One Knightsbridge Capital Monday Espresso Podcast

Monday Espresso Podcast - 19th August 2024

[00:00:00] Nathan Sweeney: It is Monday, the 19th of August. Today, I'm joined by Scott Truter, our US analyst and assistant portfolio manager. Good morning, Scott.

[00:00:08] Scott Truter: Morning, Nathan.

[00:00:09] Nathan Sweeney: Scott's going to give us a recap of what was happening in markets last week. So Scott, let's dive straight in.

[00:00:15] Scott Truter: Yes, of course. So markets were broadly positive for the week after, I think we've seen a couple of quite volatile weeks in markets.

[00:00:22] Scott Truter: So we think about the US, the NASDAQ has posted six consecutive positive days. So we've seen that reversal, also Japan being quite strong and then from bonds it's generally been flat. Those longer dated bonds have been performing a bit better. That's probably what you would expect to see as these interest rate expectations continue to move down and we maybe come closer to interest rate cuts in places

[00:00:45] Nathan Sweeney: Yeah, so I suppose there's a really good lesson here about time in the market versus trying to time the market because. If you remember back two weeks ago, Monday the 5th of August, if you turned on the TV or scrolled through your social media feed, you will have been greeted with the news that the Japanese stock market fell 12%.

[00:01:04] Nathan Sweeney: Now for some people on that news, they may have decided actually, this confirms my reason to sell out of the market, but we always say that you will often get the biggest down days followed by the biggest up days in markets. So yes, the Japanese market did fall 12% that Monday but it was up 10% on Tuesday.

[00:01:24] Nathan Sweeney: So for us, it's just a classic example of a reminder around not trying to time the market because often when you do, you miss out on those best days. Now, a lot of the concern was around the potential for a recession. So Scott, you know, what is the data telling us?

[00:01:39] Scott Truter: Yeah, so last week we had some more data from the US, if we start there.

[00:01:44] Scott Truter: So the first one was the PPI, so that's producer prices index. That's one of the Fed's preferred measures or guides of inflation. So this came in slightly lower than expected. And then we also had the actual CPI data that was 2.9% for the 12 months to July. The expectation has been 3%, so slightly lower.

[00:02:01] Scott Truter: So inflation coming down, which is suggesting things are slowing, but again, these small moves, so it is more gradual. Well, that's meant is that traders are still pricing about a 70% chance of a September rate cut coming from the Fed. So still quite a high probability there.

[00:02:17] Nathan Sweeney: Okay, so that's good news.

[00:02:19] Nathan Sweeney: Inflation coming down. This is in line with our expectations. We've talked about this throughout the year. Is we expect economic growth to moderate, as in economic growth to slow down. That means that inflation will also moderate or slow down, which is happening. You can see that with the numbers. So inflation in most regions, UK, Europe, US, between 2 and 3%.

[00:02:40] Nathan Sweeney: So that's in line with where central banks would like it to be. And that leads to interest rate cuts. So again, as Scott mentioned, the likelihood of a cut by the US central bank or the Fed, as they call it, 70% likelihood that we get that cut in September, which is not too far away. But you can see that things are playing out as we expect.

[00:03:00] Nathan Sweeney: So what are we seeing in other regions outside of the US?

[00:03:04] Scott Truter: Yeah, there was quite a lot of data out in the UK. The first one was about unemployment. So that fell to 4.2% and the forecasted being that it would move to 4.5. So the jobs market there still looking quite strong. Had inflation data out as well.

[00:03:19] Scott Truter: So the figure was 2.2%, so that's slightly higher than the previous month of 2%. However, always expected that that was going to increase, and the forecast had been 2.3%, so still coming below that. The reason why is that some of the energy price falls that we saw last year were quite sharp and obviously that's coming out the data and so whilst energy has still fallen, it's been a smaller amount so that has impacted it.

[00:03:43] Scott Truter: Maybe more positive from that is wage growth is at its lowest level in two years. So again that's positive for inflation that things may continue to come down and people don't feel like they're getting that higher pay rise on much more disposable income to use. And then I think the last figure we saw was you got GDP growth from the UK.

[00:04:02] Scott Truter: Again, in line with expectation, preliminary data for the second quarter is 0.6% and also retail sales in line with expectation. So maybe some signs of things slowing, but not very severe slowdown or sharper change.

[00:04:17] Nathan Sweeney: Yeah, so just getting that moderate slowdown. So it's good to see that growth is holding up.

[00:04:21] Nathan Sweeney: Unemployment is not rising. Inflation is coming down. So again, quite a positive picture there. And we have seen the Bank of England, they've obviously cut interest rates already, and we are expecting them to continue to do so at a steady pace and arguably, that's good for companies because ultimately it just means that financing costs reduced for those companies, which again helps with profitability.

[00:04:42] Nathan Sweeney: So just speaking of profitability, I know that margins seem to be quite high within the US at the moment. So what's all that about?

[00:04:49] Scott Truter: Yeah, so companies, their earnings have been strong on profitability and those margins been the highest and above average that we've seen for quite some time. And I think it's probably expected because you start and see inflation come down.

[00:05:01] Scott Truter: But that doesn't necessarily mean companies immediately cut their prices. So it does give them some more room and scope there for that sort of profitability in the business as they're running it. Does also mean, and it helps this path sort of picture, that things aren't as bad as maybe some of the media things suggest, that companies are still in a relatively good shape.

[00:05:21] Scott Truter: And it also means that that base case of having this slower or gradual slowdown would make sense given the strength and health of some of those companies balance sheets.

[00:05:30] Nathan Sweeney: Yeah, so I think just a good example there that obviously what's happening in market is very different to what you perhaps read in the media because we're seeing strong profits from companies that they're generating high profits or high margins.

[00:05:43] Nathan Sweeney: So what have we got this week?

[00:05:45] Scott Truter: Yeah, so a little bit more data again. So we've got European inflation data. So again, seeing what the trajectory is there. In the US we get initial jobless claims. So just trying to work out what the jobs market looks like. And in Japan, there's some inflation data as well, probably an area that people are focusing is over the weekend there'll be the Jackson Hall Symposium.

[00:06:05] Scott Truter: This is where central bankers, academics, policy makers, other influential economic thinkers meet and discuss long term policy. So often people look at that to try and get some insight on the potential direction of travel for both the economy and what might happen for central bank policy as well.

[00:06:23] Nathan Sweeney: Okay. Thank you, Scott for that. Some great detail there, some great insight for the audience today. Hopefully you enjoyed the podcast and have a great week, everybody.