Logic Monday Espresso Podcast

Monday Espresso Podcast - 14th August 2023

[00:00:00] Sheldon MacDonald: It's the 14th of August today. A pretty quiet week here in the UK last week, so let's turn our attention to the US where we saw some interesting moves. The first news that came out during the week was the CPI that was closely watched. Nathan, what did we see there?

[00:00:16] Nathan Sweeney: Yeah, so CPI, consumer price inflation.

[00:00:19] Nathan Sweeney: So this is just looking at prices and price movements in the US. Are they going up? Are they going down? Are we seeing inflation? Are we not? These numbers came in at 3.2%. They were expected to come in at 3.3%, so a little bit better than expected because those prices or inflation is coming down. So that was good news for the market because it just shows you that inflation, which has been quite high, continues to trend down to the markets like the fact that inflation's coming down.

[00:00:49] Sheldon MacDonald: Yes, that soft landing narrative, definitely gaining momentum, soft landing where the authorities managed to bring down inflation without causing a recession. So that pretty good news then on that CPI front, but markets thrown a little bit of a curve ball then later in the week when the PPI came out, that's producer price inflation.

[00:01:09] Sheldon MacDonald: That came out higher than expected, and that led to declines in bonds and also in the, the growth stocks, especially the interest rate sensitive tech stocks and so we saw quite a divergence on the week from across the indices.

[00:01:22] Sheldon MacDonald: So the Dow Jones Index, this is the heavyweight stalwarts, that index was up about 0.6% for the week. The S&P, which is the main bellwether that we look at, that was down 0.3%. But the Nasdaq, those growth tech stocks making up most of the Nasdaq that was down a full 1.9%. So you can see there the big divergence in moves.

[00:01:44] Sheldon MacDonald: We're also in the midst of earning season. It's been a little while since we spoke about it, but earning season continues. Earnings coming out slightly better than expected Nathan.

[00:01:52] Nathan Sweeney: Yeah, so what we're seeing is that coming into earning season companies earnings or their profits were expected to decline close to 10%, and now we've come through earning season all of these companies have reported their numbers and earnings are down about five and a half percent.

[00:02:08] Nathan Sweeney: So it just goes to show that corporates have actually been doing better than expected, and what we've been looking at is what to expect in the future.

[00:02:16] Nathan Sweeney: So how are companies' earnings going to continue in this environment? Higher inflation, is that good or bad for companies earnings? Interestingly, if you look towards Q3, you can see that company earnings are expected to be flat, so that's an improvement. Coming into the end of the year, they're expected to be positive, so up about 7% or 8%.

[00:02:38] Sheldon MacDonald: So again, that speaks to that soft landing narrative.

[00:02:40] Sheldon MacDonald: Maybe a rebound. We've had the destocking companies have run down their inventories and the efforts now as they start to expect things picking up, rebuilding their inventories, that pushes higher consumption. And also though some concerns on refinancing costs easing.

[00:02:57] Nathan Sweeney: Yeah, so this is the big concern, is that you have high inflation, central banks raise interest rates, and that increases costs for companies because if they want to borrow, it costs more to borrow. But companies have been really savvy over the last couple of years, what they've done is they've locked in to lower interest rates for a really long time. So some of these companies basically borrowing for 10 years at ultra-low rates, which means a lot of corporates don't have to refinance at these higher rates, which is why they have been so resilient, and the market is just really figuring that out now.

[00:03:31] Sheldon MacDonald: So they've termed out their loans, the wall of refinancing maybe not so much of a fear as as previously thought. Let's look slightly further afield, we saw weakness in China last week, slower growth in Q2, and also we saw, just last week, a negative CPI. Now that may seem like good news, but actually deflation is probably more of a concern than inflation is.

[00:03:55] Sheldon MacDonald: When you get deflation, you can essentially get to a situation where you get a consumption collapse. Why buy now today something that's going to be cheaper in a week's time or a month's time. So authorities certainly will be keeping an eye on that. We have heard about a number of stimulus policies in the wings, concerns though also on the geopolitical front in China, the US now slapping some curbs on US investment into some of the, the tech sensitive areas. So some concerns on that front China, down 3% for the week. Let's look ahead to this week. What's the focus?

[00:04:28] Nathan Sweeney: Yeah, so we actually have a big number coming out in the UK this week.

[00:04:31] Nathan Sweeney: It's UK inflation, so this has obviously been a sticking point for investors that sticky inflation as in inflation not coming down as quickly as people would hope. But the good news is that inflation number is expected to continue to trend down, and markets or investors are expecting that inflation number to come in at 6.8%.

[00:04:52] Nathan Sweeney: Anything lower than that and the market's really gonna like that. So we do expect inflation to continue to trend down. We're gonna get some good news this week on that.

[00:05:00] Sheldon MacDonald: Let's cross our fingers on that front. Also, the market. Looking at the minutes of the FOMC meeting, so the fed's last rate setting meeting, will there be any clues in there as to future trends?

[00:05:11] Sheldon MacDonald: Anyway, we look forward to speaking to you about all of those next week.