Logic Monday Espresso Podcast

Monday Espresso Podcast - 11th December 2023

[00:00:00] Sheldon MacDonald: It's the 11th of December today. Last week saw a pretty positive mood in markets all around, really, except for perhaps Asian markets but in the West, definitely positive. Equities, the S&P now up six weeks in a row and reaching a one year high last week.

[00:00:18] Sheldon MacDonald: The VIX, that's the volatility index, sometimes called the fear index because it measures the price of insuring your portfolio, that hit a new 12 month low last week so pretty strong environment on the equity side. UK markets, European markets all up as I mentioned though in Asia we did see Chinese markets down over 2%. Bond markets also positive. So what's leading to this?

[00:00:42] Sheldon MacDonald: Why the positive sentiment at the moment Nathan?

[00:00:45] Nathan Sweeney: Yeah, so this is all around expectations for interest rate cuts. So what we're seeing at the moment is that the market is saying, look, all of this inflation data that's coming out, it's been pretty good in that the numbers are lower. We've got economic growth, which is good, but it's actually slowing.

[00:01:05] Nathan Sweeney: So, all of that opens up the door to interest rate cuts. But the big question is, when will those interest rate cuts happen? And you've got two people involved in this. You've got the market on one side, and you've got the central bankers on the other.

[00:01:19] Nathan Sweeney: So, at this point in time, the market is saying, we think we start to get those interest rate cuts early next year but the central banks are going to be saying, actually, we think it's a little bit too early. But for me, it's not a question of if, it's a question of when and it is likely that we get interest rate cuts from the key central banks next year. The data of that is the unknown piece, but ultimately it's good for markets.

[00:01:47] Sheldon MacDonald: We do have central bank meetings this week and we'll speak about them in a second. Let's just continue looking back, last week, some of the data that we saw. The big one in the US was the jobs report.

[00:01:57] Sheldon MacDonald: So the jobs report, pretty strong in terms of number of jobs created, wage inflation easing though, and remember that was a key measure that Jerome Powell has been speaking about, how hot the jobs market is.

[00:02:10] Sheldon MacDonald: So some easing of that wage inflation pressure would be a positive and might perhaps just open the door to an earlier rather than later interest rate cut. But markets are really just pricing in a soft landing. No recession in sight for the moment. We saw that also in credit spreads.

[00:02:27] Sheldon MacDonald: So the additional price you pay for corporate bonds, those credit spreads are pretty tight and also pricing in no recession really in the foreseeable future. Although no recession seen though, the economy is expected to ease slightly and we did see that in the oil price.

[00:02:45] Sheldon MacDonald: So the oil price came down again last week, $71 now, that's down 5 percent on the week and that's on the back of weaker demand, which is a sign of perhaps a slowing economy. Weaker demand leading to inventories rising. In the UK we have seen some good news, the PMI's, that's the Purchasing Managers Indices.

[00:03:05] Sheldon MacDonald: These are surveys of managers in companies, asking them how do you see things in the future and those results now above 50, the 50 line being the dividing line between contraction and expansion. So above 50, inflation figures in the UK also lower than expected during this quarter. So a relatively positive picture in the UK. Now as I mentioned, we do expect central bank meetings this week. Nathan, what are we expecting?

[00:03:32] Nathan Sweeney: Yes, we've got all the key central banks actually meeting this week. So that's the US Federal Reserve, so the US Central Bank, we've got the Bank of England and we've got the European Central Bank. Now there was an expectation that we might get interest rate increases at these meetings but that's off the table, so we don't expect to see any interest rate increases at any of those meetings and that's because we've seen substantial progress on inflation as inflation continues to come down.

[00:04:01] Nathan Sweeney: But what people will be looking out for is what those central bankers say at those meetings. What they say about the progress we've had on inflation and what that means for the potential for interest rate cuts sooner than they've been hinting at.

[00:04:17] Nathan Sweeney: So everybody will be looking at every single word that they say to see if it gives any kind of a hint of when we get those interest rate cuts but as we said, we expect those central bankers to push back a little and say, look, the economy is still strong therefore, we're not likely to implement those rate cuts just yet so they're going to push back on the markets expectations a little bit.

[00:04:40] Sheldon MacDonald: Absolutely, they still need to talk tough. We've spoken about not allowing the inflation cat to get out of the bag again. So they absolutely need to make sure that inflation is dead and buried before they are seen to be willing to be cutting rates.

[00:04:56] Sheldon MacDonald: Just a hint though, that perhaps markets are getting a little bit overexcited. I just read one or two pieces that are saying the equity market moves, the strength in equity market moves is discounting the pace and scale of interest rate cuts that we would see in a recessionary environment.

[00:05:13] Sheldon MacDonald: Perhaps that's a little bit overly pessimistic. For the moment though, we remain in this more or less Goldilocks environment with growth easing but no recession, the expectations for cuts in interest rates being brought slightly forward, so sooner rather than later. We'll see how that plays out in the weeks ahead and we look forward to telling you about it next week.