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Sheldon Macdonald and Nathan Sweeney talk about the topics driving the markets in their weekly Monday update.
Monday Espresso Podcast - 16th September 2024
[00:00:00] Sheldon MacDonald: It's the 16th of September. Volatility after the flash crash of a couple of weeks ago has remained with us. Still seeing some of the aftershocks there. Fortunately, last week, though, those aftershocks were generally in the positive direction. Markets pretty much up across the board. Most regions doing pretty well, led by the US again, in particular the NASDAQ doing well.
[00:00:22] Sheldon MacDonald: So very welcome news, of course, that markets are going up, especially after all that volatility that we have been seeing. Reasons for the positiveness, it's really all-around inflation and rate cuts. We've been speaking about those obviously for many months now, even more than a year, but really just markets reacting to the chances of a rate cut, chances of recession. So we did see some data out last week, maybe pointing the direction. Scott's with me this week. Scott, take us through that.
[00:00:51] Scott Truter: Yeah. So, I think probably the big piece was the US inflation data, the headline print moving slightly lower. So came in at 2.5% market expected 2.6%. So, it's this continued slowing of inflation. A little bit of softening in jobs data though, not too much. And then it's coming to this expectation of a rate cut from the Fed when they meet this week.
[00:01:11] Sheldon MacDonald: Now, of course, previously people were starting to get very excited speaking about the chances of a 50 basis point rate cut.
[00:01:18] Sheldon MacDonald: How do we stand at the moment?
[00:01:20] Scott Truter: Yeah, again, there was maybe hoping for this bigger cut. I think markets are really fully pricing in this 25 basis points or a quarter of a percent. I think that's just because we're getting this softening, but it is still gradual. There hasn't been a sharper downturn to suggest this more deeper recession.
[00:01:37] Sheldon MacDonald: Yeah, so chances of a recession are still pretty low at the moment by most commentators and analysts, strategists and so on. One of the things that people are speaking about is the oil price and the lower gas prices. So when you're not spending as much money to fill up your car, that leaves money to spend elsewhere.
[00:01:56] Sheldon MacDonald: And obviously, we keep mentioning consumption in the US, it drives 70% of the economy. So, if people are consuming, if they are spending, little chance of a recession. So, as you say, expectations for 25 basis points there. Coming closer to home in Europe, not expectation, but the reality of a 25 basis point rate cut.
[00:02:17] Scott Truter: Yes, so on Thursday the ECB delivered that further cut taking the rates to three and a half percent again It was largely expected by the markets because inflation was around the target and there was some slowing data points particularly around Manufacturing data and growth in Germany. I think it was largely expected that was coming through
[00:02:36] Sheldon MacDonald: Yes, Europe really stuck between a rock and a hard place as they look to the future for further rate cuts and so on.
[00:02:43] Sheldon MacDonald: Clearly stagnation, weaker growth figures would argue for rate cuts. On the other hand, unemployment across the Eurozone is at pretty much record lows. So that creates a risk that wages might start to rise and that then pulls up inflation. So stagflationary environment there. Not that different to what we're seeing here in the UK, growth data also not very exciting this week.
[00:03:07] Scott Truter: Yeah, so when you look at the month-on-month growth, it's been zero, zero percent for the last two months. The expectation for this last reading was it would have increased slightly. I think you've got industrial and manufacturing data was also showing contractions there being negative.
[00:03:22] Scott Truter: So again, some signs of slowing there.
[00:03:24] Sheldon MacDonald: Yeah, so, as I say, very similar to Europe. We look ahead to next week where the UK, where the Bank of England will give us their rates decision. That's out on Thursday. We'll also be getting the latest inflation printout. As we've noted, inflation has been trending lower.
[00:03:42] Sheldon MacDonald: We'll see if we get back to that 2% level. What else? Looking forward next week. Elsewhere, also the US, the FOMC will give us their rate decision. Will they, won't they do 50 basis points? And also, we have the Bank of Japan.
[00:03:56] Scott Truter: Yes, so they have their interest rate decision on Friday and some expected inflation data as well.
[00:04:02] Scott Truter: So, if you remember, and we mentioned this at the start, there was a surprise rate hike in July, and this contributed to some of that market volatility at the beginning of August, the unwind of the yen carry trade that we talked about previously. So, it's going to be interesting to see what they do here. I think people expecting not to see some movement because of the market reaction last time, but clearly the bank of Japan, maybe a bit more secretive and not sharing as much information in advance.
[00:04:29] Scott Truter: So, we'll wait and see there.
[00:04:31] Sheldon MacDonald: So, as I mentioned at the start, very much focused this week and looking ahead next week, all around rates and inflation. Data not so encouraging, as I said, but the authorities are looking to support through easing monetary policy. We'll bring you that news and everything else that's going on this time next week.
[00:04:50] Sheldon MacDonald: Thank you.