Logic Monday Espresso Podcast

Monday Espresso Podcast - 15th January

[00:00:00] Nathan Sweeney: Good morning, everybody, it is Monday, the 15th of January.

[00:00:03] Nathan Sweeney: Today, I'm joined by Scott Truter, Assistant Portfolio Manager and US Analyst. Good morning, Scott.

[00:00:10] Scott Truter: Good morning, Nathan.

[00:00:11] Nathan Sweeney: We'll get some insight from Scott in a second, firstly, let's have a quick recap of what was happening in markets last week.

[00:00:18] Nathan Sweeney: As always, there's quite a lot happening, so let's dive straight in.

[00:00:22] Nathan Sweeney: If we look at market returns last week, they were mixed. But if you look under the hood, There's actually some quite good performance coming through.

[00:00:29] Nathan Sweeney: Japanese equities spring to mind. So the Japanese market was up over 4%, what's driving that?

[00:00:36] Nathan Sweeney: The currency has been quite weak in Japan because ultimately, they haven't been raising interest rates.

[00:00:42] Nathan Sweeney: So there's still lots of supply of money, within Japan, so that weak currency coming through.

[00:00:48] Nathan Sweeney: As a result of that, their export market is thriving, and this is really giving a boost to company profits within Japan, and you're seeing that strong performance coming through for the beginning of the year, actually, some of those benchmarks up 6 percent already.

[00:01:03] Nathan Sweeney: Bond markets were slightly mixed because there's an expectation that, yes, interest rates will be cut, but it's not going to happen as quickly as people expected because the economic data is a little bit mixed or stronger than expected.

[00:01:15] Nathan Sweeney: Speaking of which, let's take a quick look at inflation data because we did have inflation data out in the US last week Scott?

[00:01:23] Scott Truter: Yes, all eyes were on that main CPI, the Consumer Prices Index number. So it came in higher again, so it was 3.4% for the 12 months to December.

[00:01:33] Scott Truter: That was higher than the previous 12 months. measuring November 3.1%, and above economists expectations.

[00:01:39] Scott Truter: So we've seen rents being a bit higher, though they are starting to fall.

[00:01:43] Scott Truter: But when those announcements are made, there's a second piece of data included, which is the Producer Prices Index, PPI and this is what factories charge wholesalers.

[00:01:53] Scott Truter: So these costs are earlier in the supply chain, and they can be a bit more forward looking, and this eases slightly.

[00:01:59] Scott Truter: So our base case view is still that inflation continues to moderate, but the direction of travel is never just straight lines, so you will see these ebb and flows in data.

[00:02:08] Nathan Sweeney: Yes, that makes a lot of sense, you can see that inflation is likely to continue to moderate.

[00:02:13] Nathan Sweeney: But I suppose one of the big concerns people have is, could inflation spike back up? Is it all going to be plain sailing? Will inflation come back down? Particularly because you now have the rise of conflict within the Middle East.

[00:02:25] Nathan Sweeney: So as everybody knows, we have the Houthi rebels attacking ships in the Red Sea and quite rightly, this raises the question, could this cause inflation to reassert itself? Because ultimately it impacts supply chains?

[00:02:38] Nathan Sweeney: Now, if we look into it, we see that about 15% of global seaborne trade passes through the Red Sea, so it is quite an important channel for trade to come through.

[00:02:49] Nathan Sweeney: Now, because of conflict within that region, those ships are having to reroute, and ultimately, that means that those shipping times are taking longer, they're costing more, so you're adding about a week onto a ship's trade route, plus about 1 million of additional cost for transporting the ship, because you obviously have to fund fuel, etc.

[00:03:11] Nathan Sweeney: But the other thing that's happening is cargo container shipping costs are also increasing as a result because you have to rent them for a longer period. And we've seen a big, big spike in cargo shipping container costs over the course of the last week. So some of those costs have gone up by about 60% in a week.

[00:03:31] Nathan Sweeney: So the average cost of renting a container is now $2,670 for a 40 foot container.

[00:03:39] Nathan Sweeney: Now, does that mean inflation could come back to the level that we've seen over the course of the last two years?

[00:03:45] Nathan Sweeney: We don't think so. The reason being is even though you've seen a big increase in those shipping container costs, there's still only a fraction of where they got to in 2021, when we had that huge demand for product post COVID reopening, when actually cost got up to over $10,000 for a 40 foot container.

[00:04:05] Nathan Sweeney: So we actually don't see inflation reasserting itself to the same level, but you know, you can see how geopolitics can impact markets and speaking of geopolitics, we had an election over the weekend Scott?

[00:04:17] Scott Truter: Yesterday there were presidential elections in Taiwan. As anticipated, the ruling Democratic Progressive Party won the elections.

[00:04:25] Scott Truter: This was a bit of a blow for China's policy because they would have preferred a more pro China party to be in power. So the relationship between both countries is still going to be difficult.

[00:04:35] Scott Truter: But we don't think there's going to be any immediate change in policy from Taiwan's perspective, because they'll likely want to see what happens in the US presidential elections towards the end of this year.

[00:04:44] Nathan Sweeney: Okay, so let's take a quick look at the week ahead, quite a lot in there this morning.

[00:04:49] Nathan Sweeney: There's quite a lot of data actually out in the UK this week. We've got inflation data, we've got jobs data, we've got retail sales.

[00:04:55] Nathan Sweeney: Now the big focus for me is going to be earnings reports.

[00:04:58] Nathan Sweeney: So we've got companies releasing their earnings reports in the US. So what are they seeing on the inflation front? What are they seeing at an economic level?

[00:05:07] Nathan Sweeney: So we've got a lot of banks reporting this week, we've got Morgan Stanley, Goldman Sachs, Charles Schwab, and we're going to continue to have companies reporting over the course of the next couple of weeks.

[00:05:17] Nathan Sweeney: And that'll be the thing that the market wants to focus on. How are companies managing in this environment and are they able to increase earnings?

[00:05:24] Nathan Sweeney: And the likelihood is yes, because inflation is falling, and therefore their costs are falling too.

[00:05:30] Nathan Sweeney: Also in Asia, as in China, we've got fourth quarter GDP, and the government is looking to target that 5% growth, so we'll see if they actually manage to achieve that or not.

[00:05:40] Nathan Sweeney: Okay, so thank you all for listening.

[00:05:42] Nathan Sweeney: Have a great week. It's goodbye from me, and goodbye from Scott.