Logic Monday Espresso Podcast

Monday Espresso Podcast - 26th February 2024

[00:00:00] Sheldon MacDonald: It's the 26th of February today. We had another great week in equity markets last week with a number of global indices hitting new highs or continuing to improve the recent new highs. We had Japan hitting a new high for the first time in 34 years. The lost decades seemingly a thing of the past. Japan really pushing ahead.

[00:00:21] Sheldon MacDonald: China was positive up three percent. Further the central bank support coming through there, but in Western markets, really the strength, certainly in the U.S. continues on the basis last week at least of the earnings report from NVIDIA

[00:00:35] Nathan Sweeney: So yeah, last week we saw NVIDIA releasing their earnings and those earnings came out and they were way ahead of expectations.

[00:00:42] Nathan Sweeney: So NVIDIA is involved in data centers and they're at the forefront of artificial intelligence. So ultimately what we're seeing here is increased demand for microchips, which are used in large language models.

[00:00:55] Nathan Sweeney: Which is at the forefront of artificial intelligence and it's good to see those strong earnings coming through because it really demonstrates that AI is going to be an engine of growth for markets in the future but if we just take a look at Nvidia stock price this year, it's actually up 59 percent this year and it's contributing for about half of the move in the tech sector so far this year.

[00:01:18] Nathan Sweeney: So about 3.3 percent of the stock market move is down to Nvidia this year. So yeah, seeing some strong numbers there.

[00:01:25] Sheldon MacDonald: Certainly in some quarters, some concerns being raised about the narrowness of the markets, that all of the drive, all of the growth in markets, has only really been driven by a small number of stocks, the magnificent seven, as it were. But we are seeing signs, more broadly, that give us some confidence in markets.

[00:01:43] Sheldon MacDonald: So, corporate spreads, credit spreads, remaining pretty tight. That's a sign of confidence. Positioning data from hedge funds and mutual funds showing that despite the rise in markets, they're increasing their exposures to equities.

[00:01:56] Sheldon MacDonald: So that's a positive picture and then we spoke last week that we would see the UK and Europe PMI indications, so purchasing manager, manager indices coming out. They came out ahead of expectations.

[00:02:09] Sheldon MacDonald: Now these are surveys about the expectations that factory managers have. So if they're expecting things to be better than expected then again, that indicates confidence in markets.

[00:02:21] Sheldon MacDonald: Now, of course, in the last several months and years, we've been speaking about inflation, and interest rates, and the path of that. There seems somewhat, at the moment, to be less focus on that. The markets are coming around to the view, to be in line with the Fed, that perhaps there will only be three cuts this year, and markets pricing that in, and that's in line with what the Fed has been saying. And we did see Fed Minutes coming out last week, indicating that they wouldn't be in a rush to cut rates too soon.

[00:02:53] Sheldon MacDonald: They still want more confidence that the inflation will start trending back towards that 2 percent inflation target that they've been speaking about.

[00:03:02] Nathan Sweeney: Yes, I think there it's important to understand what central banks are trying to say. So ultimately, they feel that markets have got ahead of themselves, so expecting those rate cuts sooner and central banks are saying, look, we expect inflation to come down, we're just waiting for more confirmation of that and it's likely that we're going to be cutting rates around the midpoint of this year. So we expect central banks to begin that rate cutting cycle starting in June.

[00:03:26] Sheldon MacDonald: Yes, certainly a sense pervading markets that those inflation readings last month that were slightly higher than expected were perhaps a one off, that the disinflationary trend is expected to resume. We see signs of that in the oil price, which again last week was down a little bit, indicating perhaps a lack of global growth, lack of demand.

[00:03:47] Sheldon MacDonald: Let's take a look at the week ahead. We will see some further inflation indications. PCE figure is coming out, and that's, this is the one that the Fed watches pretty closely. That's personal consumption expenditures.

[00:04:00] Nathan Sweeney: Yeah. So PCE is a kind of, it's a measure of inflation, and then it's interesting when you look at inflation data, because when we came out of COVID, obviously a number of areas of the market got quite hot and, you know, really contributed to inflation and one of the last things to really spike was housing and what we've seen over the course of the last year is we've seen a cooling off in the housing market, particularly in the U.S.

[00:04:25] Nathan Sweeney: So we are expecting that data to start to come out of inflation. So that's why the central bankers are a little bit more confident that inflation will start to fall. So it will be interesting to watch those numbers over the course of the next couple of months.

[00:04:38] Nathan Sweeney: But then also this week, we've got earnings coming out. So it's kind of the tail end of earnings in the US. So we've got the likes of Workday, Salesforce, which a lot of people in the investment industry will know of. It's software that's used across the investment industry and also Dell will be reporting their earnings. But on top of that, we've got the Bank of England, they'll have things like monetary indicators and then we also have house prices, so Nationwide house prices.

[00:05:04] Nathan Sweeney: And one of the stories I was reading over the weekend was that generally across the board, you're seeing a little bit of a pickup in housing numbers and that's likely because a lot of people are anticipating these rate cuts and you're also seeing banks happy to offer cheaper mortgages because they too expect to see rates at a lower rate as we move forward.

[00:05:25] Sheldon MacDonald: Yeah. I think we can all do with rates coming down. It'll certainly help a lot of people. As always, lots to speak about and we look forward to speaking to you again next week.