Logic Monday Espresso Podcast

Monday Espresso Podcast - 20th November 2023

[00:00:00] Sheldon MacDonald: It's the 20th of November.

[00:00:02] We had another great week in markets last week, equities were up fairly strongly. Bonds were positive as well and we had the oil price down again.

[00:00:10] Now, all of this, though, the positive sentiment really on the back of some easing data, so essentially weaker economic data, what's that all about, Nathan?

[00:00:19] Nathan Sweeney: Yeah. So we had some really good news last week on the inflation front. So we had three of the key developed markets, all releasing inflation data, and let's start with the UK first.

[00:00:30] So within the UK, we saw inflation coming down from 6.7% to 4.6%, exactly what investors wanted to see, because as we all know, inflation has been quite sticky in the UK and getting confirmation that those prices are increasing at a slower rate was really welcomed by markets.

[00:00:49] Really important to also point out that inflation in the US is now 3.2% and in Europe, it's 2.9%. So it's really moving in the right direction and what that does is it alleviates the pressure on central bankers meaning, it's very unlikely that we get more interest rates from here, and that's why the market reacted so positively.

[00:01:10] Sheldon MacDonald: But some of the other fundamental data coming through on the economy, retail sales in the US, that was slightly weaker. The jobs numbers slightly weaker. So why is that driving a positive outcome?

[00:01:22] Nathan Sweeney: Yeah. So for me, this reminds me of the story of Goldilocks and the three bears. Now ultimately, if you have the porridge is too hot, so let's call that a really hot economy.

[00:01:33] That means it's likely to mean that inflation is persistent, higher for longer, therefore more central bank interest rate increases.

[00:01:41] Now, if it's too cold, if the economy is slowing too quickly, that's not going to be good for companies because they'll be generating less profit, but what we're seeing is actually the economy is just cooling at a nice pace.

[00:01:54] So, that means the porridge or the economy is actually okay, it's tasting pretty good at the moment, and that's why markets are pretty happy with this outcome.

[00:02:03] Sheldon MacDonald: We've spoken in the past couple of weeks around the earnings cycle, earnings in the US Q3 earnings season, that's largely finished, we'll speak a second about the ones coming up.

[00:02:13] But largely most of the companies have reported already, essentially a Goldilocks scenario there, they've not been excellent, not knocking out the park earnings, but they've been okay.

[00:02:22] The point I want to make though is that what we've seen in the last week or so is corporate bond spreads tightening, so the price of debt that is charged to corporates to borrow, the excess over the sovereign rate, that's been tightening.

[00:02:38] Now that indicates confidence in the market, confidence that those companies will be delivering on their earnings expectations, confidence that they will be able to deliver cash flows.

[00:02:48] Which in turn means those companies can meet those obligations, the coupon payments and the eventual repayment of those debts. So again, a positive signal from the market that things are looking okay.

[00:02:59] Nathan Sweeney: So there was a concern around earnings about the fact that companies sales haven't been as high, but they've been generating good earnings by cutting costs.

[00:03:08] But the other thing you have to consider is that costs generally for companies are now starting to come down again. So this is quite a positive because obviously companies have been facing higher headwinds from the things like oil price and wages, and as they start to come down, that benefits companies too, so there is other factors to consider when looking at earnings.

[00:03:29] Sheldon MacDonald: Let's turn our attention eastwards now, let's look at China. Obviously last week we had the meeting between President Xi and President Biden. That perhaps ramping down some of the fears at a geopolitical level. But what's happening in the economy there?

[00:03:44] Nathan Sweeney: What we're seeing is that the Chinese government is implementing more stimulus to try and stimulate the economy, and this is quite positive because as we all know, we have seen a stagnating economy from the beginning of this year.

[00:03:58] A lot of talk about reopening demand, which hasn't really filtered through, but as we get this stimulus coming through, the hope is that that starts to really push on economic growth in china.

[00:04:09] Sheldon MacDonald: There was some excitement just a few weeks ago, perhaps a month ago, that things seemed to be turning a corner positively. But that maybe seems to have just fizzled out a little bit. One of our favorite indicators that we look at, we've mentioned before, the pollution readings across the main industrial cities in China.

[00:04:24] Those pollution readings got worse, which, contrarian wise, indicate that the economy is doing better on a real time basis. Those pollution readings have just been getting better again in the last couple of weeks, indicating a perhaps slightly weaker economy. Although, you've got a slightly different take on that, right?

[00:04:41] Nathan Sweeney: Yeah, I think at some point, basically, this indicator stops working because one of the biggest investors into green energy is actually China.

[00:04:49] And actually, they now have the biggest manufacturer of electric vehicles in the world, and they've sold more electric vehicles than Tesla have. You know, and Tesla being the front runner in this space, so it just shows you how quickly they've caught up.

[00:05:03] And as that increases, clearly that's going to reduce pollution levels. So therefore, that economic indicator, unfortunately, at some point it'll become redundant.

[00:05:12] Sheldon MacDonald: Let's take a look at the week ahead. So, we mentioned earning season a minute, a moment ago, what's due out this week?

[00:05:18] Nathan Sweeney: Yeah, so I think we get the tail end of earning seasons within the US, so this is the final few companies to report their earnings.

[00:05:25] There's a couple of big ones this week, we've got Zoom, Dell, HP, but the one to really look out for is Nvidia.

[00:05:31] So if you will remember, Nvidia is the, manufacturer of chips, so microchips, which can process data really fast speeds, and those microchips are being used at the forefront of the development in artificial intelligence, so helping computers to go quicker.

[00:05:48] So if we see continued demand for that, it just shows you that companies are looking to invest more in that space. So a lot of people will be keenly focused on that this week.

[00:05:58] Sheldon MacDonald: Of course, it is Thanksgiving in the US this week, that leads on to the following day, Black Friday, that kicks off the Christmas shopping season.

[00:06:07] I've just mentioned earlier, retail sales in the US had been weaker for the previous month. Let's
see, perhaps there was some pent up, some hold back in expectation of good shopping for this Christmas season. So let's see what that brings.

[00:06:19] Thanksgiving, I said, there might be something for us to give thanks about here in the UK, we do have the Autumn Statement this week, and we've been hearing hints of lower inheritance tax, lower corporation tax.

[00:06:30] So that's it for this week and we look forward to speaking to you again next week.