One Knightsbridge Capital Monday Espresso Podcast

Monday Espresso Podcast - 26th August 2024

[00:00:00] Sheldon MacDonald: It's the 26th of August. Markets have continued to be relaxed after the volatility that we saw a couple of weeks ago. I'm joined by Raj today. Raj, what's behind that? I mean, the volatility really came from these fears that a recession was around the corner, especially in the US. Valuations on stocks were overblown.

[00:00:20] Sheldon MacDonald: What's changed?

[00:00:21] Raj Manon: So, the data that's been coming to market following that significant volatility we saw at the start of the month has been a lot more positive. So, we've seen data suggesting that inflation is continuing to cool and also that the economy, although cooling, has been showing signs of resilience.

[00:00:42] Sheldon MacDonald: You say that, but hasn't there been some really difficult labour data?

[00:00:46] Raj Manon: There has been, and that was last week. So, the difficult labour data was due to a revision to some previously released data. This does sometimes happen where data is revised upwards or downwards as the quality of the data improves. So, the labour market is of course key for assessing the state of the economy.

[00:01:06] Raj Manon: Are companies hiring or are they laying off staff? So that revision was a downward revision of 800, 000 fewer jobs being added than the market previously thought. And that was actually the biggest downward revision that we've seen since 2009. And so now that's a concern because it points to a weaker labour market and also weakness that's been coming through for longer than previously thought.

[00:01:31] Sheldon MacDonald: Having said that though, some of the more recent, shorter Twitch data has come through that actually indicates that jobs are still being created. We're seeing some other positive data earnings by Walmart and Target, big stores in the US. Their earnings tend to indicate that consumer spending is okay.

[00:01:48] Sheldon MacDonald: Gasoline demand data, that's also positive, again indicating consumer spending's okay. So, the consumer's in relatively decent shape. And the consumer, as we know, makes up 70% or more of the US economy. So, as you said earlier, the economic picture is relatively sanguine.

[00:02:06] Raj Manon: Oh, that's right.

[00:02:07] Sheldon MacDonald: So, people were getting worried that with an imminent recession, rate cuts were going to follow.

[00:02:13] Sheldon MacDonald: People were talking about 50 basis points of rate cuts. Has that picture changed?

[00:02:18] Raj Manon: So, it's looking increasingly likely that we will be seeing a rate cut sooner rather than later. The market's been ebbing and flowing between whether we see 25 basis points of cuts or 50 basis points of cuts. The bias is towards 25 currently.

[00:02:33] Sheldon MacDonald: Well, during the course of last week we saw the minutes released from the previous Fed meeting and this really, I guess, cemented the view that rate cuts are definitely coming, one way or another.

[00:02:44] Sheldon MacDonald: It seems that most of the major commentators still expecting a 50 basis points would probably be extreme to do that in the first round. We had last week the Jackson Hole Symposium. And Jerome Powell, the chair of the Fed, he spoke there, and that seemed to indicate, again, that's pretty much a certainty that we will get the rate cuts.

[00:03:04] Sheldon MacDonald: Firstly though, Raj, what is this Jackson Hole Symposium?

[00:03:07] Raj Manon: So, it's an annual symposium of major central bankers, and it's one that in recent years has been a forum where some key messages have been released to the market. Messages which have been a key driver for market moves. So, there's been an increasing amount of focus on the messages coming out of this symposium.

[00:03:29] Sheldon MacDonald: And his message for us this time?

[00:03:31] Raj Manon: And this time, Jerome Powell gave the strongest signal yet that we would be seeing an interest rate cut in September. So the Fed next meeting on the 18th of September is to decide what the next interest rate move would be.

[00:03:46] Sheldon MacDonald: So, we've been focusing on the US. Let's look slightly further afield or closer to home.

[00:03:50] Sheldon MacDonald: Europe and UK, we saw some economic releases there painting a relatively benign picture.

[00:03:55] Raj Manon: Yeah, so the UK has been in a sweet spot recently with inflation data continuing to cool. Whilst growth data has been better than expected and certainly better than the data coming out of Europe. The UK got a further boost last week with some forward looking data.

[00:04:13] Raj Manon: So, the PMI data or purchasing Manager's index. So this is a survey to find out companies spending intentions over the coming period. So reading above 50 indicates an expansion and a number below 50 indicates a contraction. So, there's been an improving trend with this data coming out of the UK and this latest release was no exception with the PMI data moving to 53.4 from the previous 52.8.

[00:04:43] Sheldon MacDonald: So, the picture there, a positive growth outlook, not so hot, not such a strong economy that it would lead to inflationary pressures, which would then derail the rate cutting plans. As I said, a relatively benign picture. That's about all we've got time for. Thanks very much Raj, and we look forward to speaking to everybody next week.