One Knightsbridge Capital Monday Espresso Podcast

Monday Espresso Podcast - 18th March 2024

[00:00:00] Nathan Sweeney: It is Monday, the 18th of March. Today, I'm joined by Scott Truter, our US analyst and assistant portfolio manager. Good morning, Scott.

[00:00:09] Scott Truter: Morning, Nathan.

[00:00:10] Nathan Sweeney: Before we get Scott on, let's take a quick recap of what was driving markets last week. As always, there's quite a lot to unpack, so let's dive straight in.

[00:00:19] Nathan Sweeney: So looking at equity markets, it was a mixed week last week. So we still have these concerns about elevated inflation and the potential for a delay in interest rates and ultimately that's saw UK equities performing quite well last week. So UK equities tend to be more defensive. So holding up whenever you get concerns in markets.

[00:00:38] Nathan Sweeney: So good 1% return there from UK equities. Chinese equities were also strong, so we'll talk about that. European equities also finished in positive territory, but it was the US that lagged and Japanese equities and we did see a little bit of a repricing in bonds. So bond prices were softer last week, so some underperformance there too. So Scott, over to you. What was driving markets last week?

[00:01:00] Scott Truter: Yeah, so in US, the big thing was inflation data. Consumer price index was 3.2% for the 12 months at the end of February. So that was up 3.1% the previous month. 3.1% was the figure the market had expected as well.

[00:01:13] Scott Truter: So we saw a slight uptick in both consumer prices and producer prices data but I think it's important to put it into context. So the peak in inflation in the US was 9.1% in June 2022. So it has come down quite considerably since then as it gets further down into around this 3%, it does get more difficult to sort of move that needle and get further down that last percent.

[00:01:36] Scott Truter: So we were expecting it probably to be a little bit stickier and more difficult to see this last move down.

[00:01:42] Nathan Sweeney: Yeah. So I suppose just like a marathon, that last mile is always the most difficult, but speaking of inflation, now clearly we have inflation at higher levels, does that change central bank's views? Do we not get rate cuts?

[00:01:55] Scott Truter: Yeah, so because the market was seeing inflation coming down, they had expected the Fed to cut this month in March. I think that's widely now expected that we're just going to see rates hold and stay the same. It doesn't mean that we're going to not see cuts at all, they just probably pushed a little bit further out.

[00:02:10] Scott Truter: I think the market now expecting a rate cut in June this year.

[00:02:13] Nathan Sweeney: Okay. And it's important to remember that, you know, what the market expects and what central banks are saying can be completely different and that was the case. So the market hoping we get lots of rate cuts and the central bank saying, look, it's probably going to start to happen in June of this year, this summer and you know, expectation is that continues.

[00:02:32] Nathan Sweeney: Now, speaking of central banks, is there anything else on your radar?

[00:02:35] Scott Truter: So the Bank of Japan are the last central bank to have negative interest rates. So there's been a lot of discussion about them removing this, and it was expected that that would happen in April.

[00:02:45] Scott Truter: However, I think it's now being discussed that we may even see that this month in March. Japanese businesses are already starting to see some higher borrowing costs. So that's already been priced in within the sort of banking sector. So we're probably expecting that to change soon.

[00:02:59] Nathan Sweeney: Okay and there's a close neighbour of Japan, obviously China, it is the year of the dragon in China. Are we seeing any signs of life being breathed into that market?

[00:03:09] Scott Truter: Yeah, so we are seeing some retail sales data and that's come and increased a little bit to 5.5%. It's in line with estimates and expectations I think it has been 7% when you look at the previous year. So still a bit lower, but there is obviously some signs of movement and we also saw industrial data at 7% for January and February again up from that same period last year. We're seeing some things moving and, you know, better than expected in other places.

[00:03:36] Scott Truter: So some green shoots there.

[00:03:38] Nathan Sweeney: Okay. So it's good to see, obviously there's been a lot of concerns about China, you know, the economy has been faced with a number of really big issues, the property market is clearly one and you're starting to see a bit more competition and pushback from regions, particularly because, China has some really good product, but a lot of that product is quite cheap.

[00:03:59] Nathan Sweeney: So the auto sector will be one example where we expect to see a little bit more conflict in terms of, trade and, we have already picked up on the fact that Donald Trump has come out and said, if he is reelected and he does become president, he is likely to put tariffs in place on China and a lot of Chinese goods and, you know, he has proposed a blanket 10% tariff on all Chinese imports.

[00:04:23] Nathan Sweeney: So again, you're likely to see a continuation of that trade friction as we move throughout this year. Now, I suppose we've covered off quite a lot in that, so we should probably just take a quick look at the week ahead is there anything else that we should be looking out for this week?

[00:04:37] Scott Truter: So staying with central banks the Bank of England is meeting next week and we are expecting they're going to hold their interest rates steady at 5.25% it may mean that there's a rate cut in the summer but we'll see how things progress.

[00:04:50] Nathan Sweeney: Okay, perfect. Thank you, Scott. Thanks for joining me this morning.

[00:04:52] Nathan Sweeney: Very insightful. Lots of great information there and have a great week, everybody.