Monday Espresso Podcast - 21st October 2024

[00:00:00] Scott Truter: It's Monday, the 21st of October. I'm Scott Truter to an assistant portfolio manager at Marlborough. I'll be running through some of the main news from last week with Sarah Todino, our other assistant portfolio manager on the team. Good morning, Sarah.

[00:00:13] Sarah Todino: Good morning, Scott.

[00:00:14] Scott Truter: So Sarah, why don't we start with how markets performed last week?

[00:00:18] Sarah Todino: Well, equities were broadly negative or flat, though the standout for the week on the positive was the UK. Whilst China continued to lag, fixed income was broadly positive as bond yields fell. It's been a big week for inflation data and interest rate decisions impacting markets, which we will go into a little more detail on.

[00:00:37] Scott Truter: Yeah, so why don't we start in the UK? Because last week, of course, we had UK GDP growth figures. They're in line with expectations, but the positive was that we saw some growth again after two months of zero growth. So what data has come out this week?

[00:00:51] Sarah Todino: So inflation fell more than expected to 1.7% in September.

[00:00:56] Sarah Todino: That's the lowest level since April 2021 and follows two months at 2.2%. We've also saw Unemployment fall slightly to 4% in the three months to August and wage growth slowed for the fourth month in a row with an increase of 4.9% year on year.

[00:01:14] Scott Truter: So like other regions, inflation's fallen a long way since its peak.

[00:01:19] Scott Truter: We said the same about the US last week, but generally inflation feels less of a concern and definitely less risk that we start to see an uptick again and inflation increasing.

[00:01:28] Sarah Todino: Yes, and inflation has come down to below the Bank of England's target of 2% as well. So coupled with the labour market figures from this week, it does support the case for an interest rate cut in November.

[00:01:41] Scott Truter: Yeah, markets keep looking for these signs and suggestions of when the next rate cuts will be. And if you looked at the market reaction after this announcement, the FTSE 100 reached its highest level in six weeks on Wednesday following that inflation print.

[00:01:53] Sarah Todino: Yes, this strengthened the case for an interest rate cut.

[00:01:56] Sarah Todino: So we also saw a rally in UK gilts sending yields lower and that's following recent weeks where yields have actually been increasing on speculation over the forthcoming UK budget.

[00:02:07] Scott Truter: Yeah, and on the budget we did see, before that, the FTSE 100 pull back a little bit because, as you mentioned, there's a lot of speculation going on about Labour's first budget.

[00:02:16] Scott Truter: Clearly, everyone wanting to avoid a repeat of the list trust effect and hoping the government has learnt the lessons, but markets are still a little bit jittery. We'll need to wait for the full announcement to really understand the impact, but I suppose let's get back to central banks. So, we know the Bank of England's meeting in November.

[00:02:33] Scott Truter: But the ECB, so the European Central Bank, met this week, didn't they? And we've been seeing signs of weakness in the Eurozone with growth slowing?

[00:02:41] Sarah Todino: Yes, and inflation was revised lower to 1. 7% in Europe. And that was after an initial estimate of 1.8% earlier in the month. So this figures below the ECB target of 2% are meant that an interest rate cut was widely anticipated.

[00:02:57] Sarah Todino: So as a recap, the ECB cut rates in June and September and October has seen an interest rate cut of 0.25%, taking it to 3.25%, and that's the first back to back cut in 13 years. So what's important here was the messaging around the. direction for future cuts, but this has remained the same, continuing to be data dependent and meeting by meeting, but the ECB did acknowledge that inflation is expected to rise in the short term, but should decline towards that target of 2% again back in 2025.

[00:03:31] Sarah Todino: And European equity markets gained on these interest rate expectations?

[00:03:35] Scott Truter: They did, but European equity markets were lower early in the week with some disappointing results in earnings season.

[00:03:42] Sarah Todino: Yeah, so the chipmaker ASML issued an earnings report, which showed lower than expected 2025 sales projections.

[00:03:49] Sarah Todino: But what was interesting here is that the report was actually leaked early, sending its shares down by 15%. Within luxury goods, LVMH announced a fall in Q3 sales, and that is the first fall since the COVID pandemic, and that was due to lower Chinese demand.

[00:04:07] Scott Truter: Okay, I think speaking of China And we had Alex on last week giving us a bit more information on the policy announcements and what's been happening.

[00:04:15] Scott Truter: But there was some Chinese GDP growth data out on Friday.

[00:04:18] Sarah Todino: Yes, the figures came in slightly ahead of expectations. 4.6% for the third quarter versus 4.5% which was forecast. And it means that the first nine months of this year, the economy has grown 4.8%. And we know China's full year target is around 5%.

[00:04:36] Scott Truter: Yeah, it could still be challenging for China to hit that target, given the continued weakness in the property sector, the lack of consistent domestic consumer demand, and challenges with trade frictions to the West, particularly US. So, we'll have to wait and see with that.

[00:04:52] Sarah Todino: So, just to round off the week, it's worth mentioning we had Japanese inflation data as well.

[00:04:57] Sarah Todino: So, the annual inflation rate fell to 2.5% in September, falling from 3 % in August, and that's a five-month low.

[00:05:04] Scott Truter: Thanks, Sarah. So, yeah, a lot of information there. And I think from a developed economy's perspective, everything's probably moving as we expected. Inflation's coming down. The other data points is showing some slowing, but not too significant and not too quickly.

[00:05:19] Scott Truter: So, this base case of a soft landing, we keep talking about is still what we expect and still what we're seeing from the data, Japan is slightly different because they're in a process of raising rates, but So seeing some inflation there is positive given the issues they've had with prices previously.

[00:05:35] Scott Truter: There are still some questions over China, and we talked about that in more detail last week, but markets want to see that follow through of those policies and possibly further stimulus. So, we'll wait to see on that. So I think, yeah, a lot going on last week. So, I suppose, Sarah, what's going on this week?

[00:05:50] Sarah Todino: Okay. This week we've got an update on PMI data and that's in UK, Europe, Japan, and the US. So, this is just a survey and provides an indicator of economic trends in manufacturing and services sectors. We've also got consumer confidence data in the UK and Europe, and we'll be looking here to see how sentiment follows the recent data points we've been seeing.

[00:06:11] Scott Truter: Thanks, Sarah. So yeah, maybe a little bit quieter on data, but obviously always a lot sort of happening. There's lots of information and knowledge to digest. So, I suppose just left to say thanks to everyone for listening. If you do have any questions, please do get in touch and let us know. And we'll be back next week with more insights.

[00:06:27] Scott Truter: Thank you.