22/04/24: Inflation divergence, geopolitical tensions & reporting season
Monday Espresso Podcast - 22nd April 2024
[00:00:00] Nathan Sweeney: It's Monday, the 22nd of April. And today I'm joined by Raj Manan. Raj is our head of investment solutions here at Marlborough multi asset. Good morning, Raj.
[00:00:10] Raj Manon: Good morning Nathan.
[00:00:11] Nathan Sweeney: So firstly, I'll start with a quick recap of markets before I go on to Raj and we get some of the insights into what was driving markets last week.
[00:00:18] Nathan Sweeney: If we look at equity markets, they were actually down for the week. So ultimately what we're seeing here is markets are trying to recalibrate interest rate expectations. So we're trying to price in when we get those interest rate cuts and what that will mean for companies profits. So we're seeing a little bit of a pullback at the moment.
[00:00:34] Nathan Sweeney: We are seeing some more encouraging moves from bonds towards the end of the week as markets are now starting to begin to price in interest rate cuts in some markets and we'll decipher between that as we go through the podcast this morning, but we are seeing a little bit of a deviation between what we expect central banks to do.
[00:00:52] Nathan Sweeney: So the first thing to highlight is that we're definitely seeing some hotter economic data coming through in the US. So we saw retail sales this week coming in hotter than expected, manufacturing data coming in hotter than expected and what that means is, strong economy, and this is leading central bankers in the US to say, actually, we might have to delay the timing of that interest rate cut.
[00:01:15] Nathan Sweeney: But what I wanted to get some insight from, from Raj was Raj, ultimately, are we seeing the same thing happening in the UK?
[00:01:23] Raj Manon: No, it's a different picture in the UK. So data coming out of the market this week highlighted economic weakness and continued disinflationary forces. So starting with inflation, that continued to fall, coming in at 3.2% from the previous month's 3.4%. Then turning to the unemployment rate, that increased to 4.2% from the previous 3.9%. And then finally we also had retail sales data and that was flat over the month and that disappointed the market, because the expectation was that we would see 0.3% of growth.
[00:02:04] Raj Manon: Putting that all together, it supports the case for interest rate cuts in the UK.
[00:02:10] Nathan Sweeney: Okay, so that's interesting because people might suspect that we're seeing some weaker data there, that's bad, but actually you're saying that, you know, that's a good outcome, I suppose, for markets too, if those interest rate cuts come through.
[00:02:22] Raj Manon: That's right, and we're hearing comment from the Bank of England suggesting that the Bank of England won't wait for the US Fed to move first. They would be comfortable to reduce interest rates in the UK before the US makes a move.
[00:02:37] Nathan Sweeney: Okay, so that's one thing a lot of investors have been concerned about.
[00:02:41] Nathan Sweeney: Do we have to see the Fed cut interest rates first before everybody else
does? But it certainly looks like that is not going to be the case this time around because the data in the US is too strong for rate cuts, but actually it's cooling down nicely in the UK, which opens up the door for rate cuts. So that is quite good news.
[00:03:00] Nathan Sweeney: I did see we also had a report from the IMF and ultimately they've got some concerns about high levels of debt that we're seeing in governments around the world, notably the UK and the US and actually what we have seen is that's been quite good for the gold price. And we also have geopolitical tensions in the Middle East, which are also supporting the gold price and we see that gold is up again, and it's had a very strong start to this year, but up just over a percent again this week.
[00:03:30] Nathan Sweeney: At the end of last week's podcast, we did ask our viewers if they had any questions and actually we have our first question that we're going to air on the podcast this morning and the question centers around the oil price and what is the oil price telling us about the potential for a recession?
[00:03:49] Nathan Sweeney: So what we highlighted last week was the fact that if we saw material increase in the oil price, it could lead to a potential recession and how that works ultimately is if the oil price increases, then people are spending more money at the petrol pumps and they've less money to spend elsewhere and that translates into lower economic growth.
[00:04:09] Nathan Sweeney: Now, interestingly, we know that there is increased conflict in the Middle East and we have seen Iran launching missiles at Israel and Israel obviously retaliating to those missile attacks. And for us, the real standout here is that the oil price hasn't really budged and it's actually down for the week.
[00:04:30] Nathan Sweeney: So, what this is telling us is that the market is not really concerned about the escalation that's happening in the moment in the Middle East leading to a full blown outbreak in war and this is why the oil price has remained quite subdued. And from that perspective, we don't actually see the potential for a severe increase in the oil price leading to a recession because it's just not translating at the moment.
[00:04:57] Nathan Sweeney: Now, clearly, this is something which we're keeping a very close eye on, and we will continue to watch that. Now, what I wanted to do is lastly was just give a quick recap of what we're expecting now we're in the middle of reporting season. So this is companies reporting their earnings. And we do have some of the big tech companies reporting.
[00:05:14] Nathan Sweeney: So a lot of people will be focused on that. We've got Google, we've got Microsoft, and we've got Meta. Aka Facebook reporting their earnings. These are big, magnificent seven type companies so people would be very focused and interested to see how they're doing in the current climate.
[00:05:30] Nathan Sweeney: Some of the other big news we have out. We do have the Bank of Japan with their interest rate decision. So people would be focused on that. However, we're not expecting them to change interest rates. They're currently 0% in Japan.
[00:05:43] Nathan Sweeney: We also have some GDP data out in the US and people will be looking at that to see how is the economy doing? Because if the economy is slowing, then it means that actually the central bank will open up the door to cutting interest rates. So that is quite a big data point, but that's all we were going to cover off today. And as we've said previously, if you do have questions, send them in, because we would love to tackle them on the show.
[00:06:05] Nathan Sweeney: Thank you Raj for your insights today and have a great week, everybody.
