Logic Monday Espresso Podcast

Monday Espresso Podcast - 31st July 2023

[00:00:00] Sheldon MacDonald: It's the 31st of July today, the big news on everybody's mind this week is the Bank of England. Will they raise rates? Certainly, that's the expectation for the markets. Nathan, what are you seeing?

[00:00:12] Nathan Sweeney: Yeah, so we're looking at a 25 basis point rate hike in the UK this week, which will bring interest rates to 5.25%.

[00:00:20] Nathan Sweeney: Interestingly, I was reading over the weekend that Ben Bernanke will be coming into the Bank of England to do a review, because as we all know, the Bank of England has got their forecasting pretty wrong when it comes to inflation. So they're bringing in the heavyweight, as you remember, Ben Bernanke is the ex-chair of the Fed, which is the US Central Bank.

[00:00:41] Nathan Sweeney: So he's got a lot of credibility in that space. So a big name's come in and kind of look at the inflation side, how to get that right.

[00:00:49] Sheldon MacDonald: Almost an impossible job in the last year or so. It's surprised us on the upside and now starting to surprise on the downside too. Now we may be facing a rate hike but that need not be bad news for markets.

[00:01:02] Sheldon MacDonald: We had a rate hike in the US last week, and actually markets were pretty strong. We had a rate hike in Europe last week and markets, pretty strong. So markets or like market participants beginning now to look beyond this rate hike cycle and actually taking some pretty optimistic views.

[00:01:19] Nathan Sweeney: Yeah, so what we're seeing here is pretty much a glass-half-full view of the markets and the reason markets are more optimistic because we do expect the US Central Bank and the European Central Bank to end their rate-rising policies.

[00:01:35] Nathan Sweeney: So to stop basically raising interest rates. The other thing to, I suppose, highlight is that inflation is easing as well. So the fact that central banks have looking to stop raising rates is telling you they're comfortable with inflation.

[00:01:48] Nathan Sweeney: And then the other thing which has come out last week was growth figures in the US. So the economy is still strong. So despite all of these rate rises, there's no recession, plus we have falling inflation and all of that is really good news for markets because it provides a good backdrop for companies to continue to earn profits.

[00:02:05] Sheldon MacDonald: Let's come to companies in a second, but you spoke there about the end of the rate hiking cycle, chairman Powell though, in his speech after hiking rates did mention that rate cuts are probably still a year away, and so that may be giving a little bit of a pause for thought for market participants. Yeah, markets had started pricing in cuts as early as the beginning of next year, but perhaps really just need to rationalise some of those views.

[00:02:31] Sheldon MacDonald: Now, you spoke about companies and how they're managing. We've had 51% of companies reporting their Q2 earnings so far, and still no sign of recession. 80% of companies have been beating earnings expectations. Now we know that companies do low ball their forecasts but the fact that 80% of companies are beating is positive.

[00:02:53] Sheldon MacDonald: Other positive signs, corporate bond spreads are still tightening both investment grade and high yield, so-called junk bonds, companies, those spreads tightening, and that's also a positive view. We've had, as you mentioned GDP, that came out 2.4%. That's higher than expected. Consumer sentiment has been positive, so a lot of positive news there.

[00:03:14] Sheldon MacDonald: Just a little bit of a pause for thought though. Valuations in US equities now getting slightly expensive and sentiment is almost university bullish now so a contrarian might say hang on a second this has maybe gone a little bit too far. As always, we caution about volatility in markets, so always beware of, of the potential for that volatility.

[00:03:37] Sheldon MacDonald: Now something I wanted to raise is the, the negative view that we all take on inflation and rising rates and what it's doing to the economy. I just read a snippet this week that said, with the increased interest rates in the US, that's taken about $151 billion worth of spending out of the market, out of the economy through higher mortgage rates, credit card payments, and so on.

[00:04:01] Sheldon MacDonald: But the flip side to that is that it's actually also those higher rates that have added back in $121 billion worth of spending through increased income from investments. So it's not all bad. Yes, it is a net negative, and that's why rising rates does cool an economy, but it's not as bad as you might think.

[00:04:20] Sheldon MacDonald: So hence that ongoing optimism that we're seeing. Let's turn our attention slightly wider. China was an outperforming market this week, Nathan?

[00:04:28] Nathan Sweeney: Yeah, so we had a conference or a meeting in China last Monday, so this is all the top execs in China, and they give their assessment of what's happening in the economy.

[00:04:38] Nathan Sweeney: So from their perspective, they're saying things aren't great. Obviously, the property market is being under a bit of pressure. They're selling less stuff, so exporting less and economic growth hasn't been as good as they want it to be post covid reopening.

[00:04:52] Nathan Sweeney: But that's actually good news because it means that you're likely to see the government step in and provide more measures of support for the economy and as a result, the markets actually rallied quite strongly last week and the Chinese stock market was up well over 4% last week.

[00:05:07] Nathan Sweeney: So what investors are expecting between now and the end of the year is several measures to support the property market and to support markets generally in different areas of the economy, which is why you're seeing investors focus on China at the moment.

[00:05:23] Sheldon MacDonald: An interesting, take a soundbite if you like. You mentioned support for the property market previously there was a statement in their news conference after their meeting that said, Housing is for living in not for speculation. They've now removed that statement from their comments. So as you've mentioned, Nathan, perhaps some stimulus gonna come through on that front.

[00:05:42] Sheldon MacDonald: Let's quickly look at the week ahead. As we started right at the beginning, we've got the Bank of England meeting. What else are we looking at this week?

[00:05:49] Nathan Sweeney: So we've got a lot of companies continuing to report their earnings. So in the US the companies we'll be focusing on this week our Apple, Amazon, Uber, Caterpillar, Starbucks, PayPal, Airbnb.

[00:06:00] Nathan Sweeney: So some big names delivering their earnings. So there'll be a focus there. We've got the jobs report in the US, so is unemployment still at 3.6% or will it be rising? So we'll keep a close eye on that and we also have inflation figures in the Eurozone, and as we remember, inflation has been coming down, so we'd look to see a continuation in that trend.

[00:06:20] Sheldon MacDonald: So there as always, plenty to look out for and we look forward to speaking to you next week.