Macro Perspective 39 | Current macroeconomic and market conditions

In this podcast, Peter Brooke, discusses the current macroeconomic and market conditions, highlighting the challenges posed by rising interest rates, high oil prices, and weaker economic data, particularly in the Eurozone.

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Chapters

• 0:00 Peter gives an update on what is happening in macro and markets in the last month
• 0:52 The breaking news story this month – the oil price
• 1:26 Other news flow from around the world, including disappointment from China
• 2:50 Closing summary

Transcript

Peter Brooke  00:00

Good day, I'm Peter Brooke, a Portfolio Manager at the Old Mutual Investment Group. This is Macro Perspective 39 of 2023, and I'm going to give a quick update on what's happening in macro and markets in the last month. 

For the first time in a long time, the emphasis isn't on short rates. With the pace of hikes slowing with just the ECB, Denmark and Norway hiking by 25 basis points each. And importantly, on the other side, we now have cuts, with Peru, Brazil, and Poland all cutting rates. The main story on short rate is higher for longer, with hawkish holds from the Fed, and our own South African Reserve Bank shifting rate expectations or expectations for cuts further out. 

Peter Brooke  00:52

The breaking news story this month has been the oil price, which has risen to over $90 a barrel. A higher oil price is particularly unhelpful to equity markets, as it decreases growth and increases inflation. This is in particular, when that oil price increase is driven not so much by demand, but by tightness and supply. And with a lack of capital expenditure and great supply discipline from OPEC+, we're not surprised by higher oil price. And this represents an unfortunate headwind. 

Peter Brooke  01:26

In terms of other news flow around the world, there hasn't been much. Bit of disappointment from China, where markets were hoping for an acceleration of stimulus. And I think this slow news cycle means that emphasis shifts to the longer term trends and here, time is our enemy. Higher rates for longer are a slow poison that will sap the global economic strength, whether through higher interest rate burden taking away from consumption, reduced investment in housing, or tighter credit conditions squeezing small businesses. Our base case for this year was for a slower global economy. And in fact, this was too pessimistic, where we've seen steady upgrades in 2023 GDP growth expectations. However, these expectations have come at the cost of downgrades in 2024. In a way, I think the Eurozone macro data looks like it is showing the way, as the sugar rush of lower energy prices wore off, the relentless rise of rates, its inability to generate its own growth, and its over-reliance on external growth as a result, especially on China, has seen European PMIs fall to 43. 

Peter Brooke  02:50

In summary, we've seen a combination of a higher cost of capital through rising bond yields, with weaker macro news, and earnings have either stalled or deteriorated. This has meant falling equity markets in September, and as global bonds selling off, there were less places to hide. Much of this is in line with expectations that we think markets will remain tricky until the next big positive catalyst, which will be falling rates, both on the long and the short end. Talking of  tricky, my thoughts go out to all the people affected by the storms in the Western Cape. This weather highlights there are more important things that we have to contend with than just volatile markets. Much like we must build resilience in our portfolios, we must build resilience in our communities. I hope you find this perspective useful. Until next week.