One Knightsbridge Capital Monday Espresso Podcast

Monday Espresso Podcast - 8th April 2024

[00:00:00] Nathan Sweeney: It is Monday the 8th of April. So today I'm joined by Raj Manan. Raj is our Head of Investment Solutions at Marlborough Multi-Asset. Good morning, Raj.

[00:00:09] Raj Manon: Good morning, Nathan.

[00:00:10] Nathan Sweeney: We'll get some insights from Raj in a second, but firstly, let's recap on what was driving markets last week. As always, there's quite a lot to unpack, so let's dive straight in.

[00:00:20] Nathan Sweeney: If we look at equity markets, they did lag last week, and this was in the face of better than expected economic data. So you might be wondering, why are markets down if the economic data is better? One of the reasons behind that is, What does that mean for interest rate cuts? And we'll get some insight into that in a second from Raj, but what we saw was UK equities and US equities, they fell by about just under a percent.

[00:00:45] Nathan Sweeney: And you did see towards the end of the week, a bit of a clawback or some stronger performance coming through, as people are questioning, you know, what does that stronger economic data mean for company profits? And again, we'll discuss that in a second, but some mixed results in markets, actually, Chinese equities were positive for the week. We are starting to see some activity picking up there, but all in all a mixed picture.

[00:01:05] Nathan Sweeney: So Raj, one of the biggest news stories last week was the jobs report, which came out on Friday. So what was that telling us about the US and the US economy?

[00:01:15] Raj Manon: So that was telling us that there is further evidence of a strong US economy. So that jobs report came in better than expected, with unemployment at 3.8%, and that was versus an expected 3.9%.

[00:01:30] Nathan Sweeney: Okay, so there's been a lot of talk about a soft landing, so the economy gradually slowing down, but at the moment we're seeing no landing, as in the economy is staying strong and the question there is, what does that mean for interest rates and interest rate cuts?

[00:01:48] Nathan Sweeney: Do we get those interest rate cuts?

[00:01:50] Raj Manon: That data point did lead the market to question how many rate cuts we do see this year and when we see that first rate cut also.

[00:01:59] Nathan Sweeney: Yeah, so interestingly if we look at the market what it does is it tries to price in when we get those rate cuts and how many rate cuts we get, and so there was an expectation before this data came out that we might get three interest rate cuts starting in June and now the market is starting to question actually will that happen?

[00:02:17] Nathan Sweeney: So there's about a 50% chance that we get that first rate cut in June, and then there's about similar odds that maybe we get two or three rate cuts this year.

[00:02:27] Nathan Sweeney: So you can see that there's a little bit of change in expectation for rate cuts. I suppose that the other question then is, is that the same everywhere? So we're seeing this stronger economy in the US, but what about Europe? Is it similar there too?

[00:02:41] Raj Manon: No, it's a different picture in Europe. We're seeing a weaker economic performance and that's leading to inflation coming in lower than expected.

[00:02:50] Raj Manon: So we had inflation numbers last week coming in at 2.4% versus an expected 2.6%.

[00:02:56] Nathan Sweeney: Okay. That's quite interesting. Fascinating. So we can see there's a little bit of a divergence between those two economies. So does that change the view on interest rate cuts? Are we expecting maybe Europe to cut interest rates sooner than expected? Is that where we're at?

[00:03:12] Raj Manon: Yes, an especially interesting time to get that data point with the ECB meeting this week. So it does now look like we could actually see interest rate cuts happening in Europe before we see them in the US.

[00:03:26] Nathan Sweeney: That's fascinating because, you know, a lot of people have come to the conclusion that, you know, the Fed kind of leads the market and tends to lead with interest rate cuts and interest rate rises.

[00:03:35] Nathan Sweeney: So that will be very interesting to see if the ECB in fact does cut interest rates first. So they do have a central bank meeting and we'll be looking to see the language that comes out of that. So what they say post that meeting. Will they be talking about when those rate cuts come through?

[00:03:50] Nathan Sweeney: So, you know, that is quite an important data point this week. But actually let's take a quick look at some of the other data points coming out this week.

[00:03:56] Nathan Sweeney: So we do have minutes which will be released from the FOMC meeting. So this is the US central bank. So we'll get some insight into their view on what they expect to happen in the economy and what they expect to happen with interest rates. I think importantly, that will be backed up by an inflation report this week. So if that inflation number comes in weaker than expected, it just reinforces those potential rate cuts in the US.

[00:04:22] Nathan Sweeney: So will they happen in June or will they happen further out on top of that? In the UK, we do have GDP figures coming out, so a lot of people will be looking at those GDP figures and looking to see how the economy is doing. It's likely that we're not seeing any huge growth there, it's flatlining, so looking for growth of about 0. 2% for the month. And then the other big thing to focus on this week is US earnings. So companies will be reporting their earnings for Q1, and a lot of the big banks will be reporting their earnings on Friday and given the fact that the economy is a bit stronger than expected. We'd like to see those earnings stronger than expected.

[00:05:00] Nathan Sweeney: So people will be focusing on that. Raj, thank you for your insights today. Very insightful. Lots of good snippets there for our audience and for everybody who's listening. I hope you have a great week and looking forward to speaking with you all next week.