Logic Monday Espresso Podcast

Monday Espresso Podcast - 19th February 2024

[00:00:00] Sheldon MacDonald: It's the 19th of February today. Very interesting week last week, we had UK equities up and we had Japanese equities up, both of those economies though reporting that they went into a recession. On the other hand, we had the US market down slightly and finally the Chinese market that was up, really playing catch up after their long holiday celebrating the start of the year of the Dragon.

[00:00:23] Sheldon MacDonald: Really, though, the story was about inflation, and again, a tale of two halves. We've got inflation in the US coming out slightly higher than expected, and in the UK, slightly lower than expected and therein lies the clues to what happened in markets.

[00:00:38] Sheldon MacDonald: Let's start on the UK side, Nathan. So the recession, let's start there.

[00:00:43] Nathan Sweeney: Okay, so we saw economic growth in the UK came out weaker than expected. So the economy contracted by minus 0.3%. Now, the key takeaway from that is that it's only a real minor contraction, so we're not seeing any material slowdown in economic growth and that's why you saw a better reaction in the market.

[00:01:06] Nathan Sweeney: And one other way to think about that is if you do have a weak economy, it opens the door for the central bank to say, look, we're happy to reduce interest rates to kickstart the economy, so there's a little bit of that being priced in too.

[00:01:19] Sheldon MacDonald: Also, on the announcement of that UK recession, we did have the Governor of the Reserve Bank, Andrew Bailey, indicating though that more recent indications would hint toward the economy turning up sooner rather than later.

[00:01:33] Sheldon MacDonald: We'll chat about that a little bit later, when we speak about the week ahead. But let's then move to the inflation picture, so slightly lower than expected inflation and the market coming around to a view that we might see our first cut in May and I guess, as I said, therein lies the clue as to why markets were up. This would be a positive move.

[00:01:53] Nathan Sweeney: Yeah, so definitely, if you look into those inflation figures, you can see things like energy have been coming down, continuing to come down.

[00:02:01] Nathan Sweeney: Food inflation, which was a big one last year, that's coming down too and the central bank is saying, we expect inflation to be around 2% by the end of the year and we are moving towards that and again that opens the door to that big interest rate cut that everybody's expecting. So looking forward to those summer months when we expect those rate cuts to come through.

[00:02:20] Sheldon MacDonald: Now let's look at the US, where inflation was higher than expected. It was unchanged for the month, but as I say, higher than expected.

[00:02:28] Sheldon MacDonald: About a month ago, expectations for the first interest rate cut in the U.S., the odds were 63% that the first rate cut would come through in March. All of a sudden, that's now down to only about 11% odds that that will happen. After these inflation numbers, we had both the CPI and the PPI, so consumer prices and producer prices, higher than expected.

[00:02:52] Nathan Sweeney: Now, interestingly, if you do look at those inflation figures, they have come out lower than the previous month so the previous month they were at 3.4% and now 3.1% so still trending down and you have to remember that the central bank has been saying all along, Look, inflation is falling, we're going to reduce interest rates but they've been talking about interest rate cuts around the middle of the year the market has been hoping that they come sooner. So we're seeing the market moving towards the central bank's language and expectations around when we get those rate cuts.

[00:03:26] Sheldon MacDonald: Now, on the back of this, higher than expected inflation, bonds did react, bonds weaker on the news of that so, for equity heavy or U.S. heavy multi asset portfolios that also have bonds, that was a negative week. As we say that on the UK side, positive markets there, positive markets in Japan, Europe and China, so pretty much everywhere except the U.S.

[00:03:47] Sheldon MacDonald: Staying with the U.S., we've been speaking about earnings season. So, earnings season coming to an end now, but any surprises this past week?

[00:03:55] Nathan Sweeney: No, so companies are generating positive earnings that's, a really good outcome because if you think about it, we have had inflation at multi-decade high.

[00:04:05] Nathan Sweeney: So we haven't seen this kind of inflation in a really, really long time and it's not really eroding companies profits in the way that people expected it to. So it's quite a good outcome to see that companies are actually growing positively, even though it's only a little bit, they're growing at about 2 8%.

[00:04:22] Sheldon MacDonald: Staying with earnings, we do have a couple of companies still reporting this week NVIDIA, the big one.

[00:04:27] Nathan Sweeney: Yeah. If we think about NVIDIA, NVIDIA has been in the press quite a lot because they produce microchips, which are helping in artificial intelligence because, these microchips can process lots of information and you need lots of information to process all the data for AI and this company is reporting its earnings this week.

[00:04:47] Nathan Sweeney: So there's big expectations from this company and it's clearly linked to AI and all the hype around AI. So we would love to see this company delivering earnings ahead of
expectation because that would be quite good news for the market but there's lots of other companies reporting too. We've got Home Depot, Walmart, Etsy, Berkshire Hathaway is another big one as well.

[00:05:07] Sheldon MacDonald: And then we hinted at this earlier, the purchasing managers index that will be released this week. The PMI's always interesting to watch because they always give us the first indications.

[00:05:18] Sheldon MacDonald: These are based on surveys of what factory managers expect to be happening. So, take them with a pinch of salt because they're based on surveys but because we're not waiting for the data, because it's not past history, these give us the first indications. So eagle-eyed watchers will be looking out for those figures this week.

[00:05:36] Nathan Sweeney: Yeah, and the last thing to mention is we have minutes from the Fed.

[00:05:39] Nathan Sweeney: So, this is the U.S. Central Bank will be releasing minutes from their last meeting and everybody's going to be looking at those notes, scrutinizing them to see, do we get any clues of those rate cuts?

[00:05:50] Sheldon MacDonald: As always lots going on and we look forward to speaking to you about those things next week.