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Don’t Worry, It’s Only ‘Wayang Kulit’ At Capitol Hill

Tony Nash, CEO of Complete Intelligence, discusses the impact of US CPI numbers on Fed policy, debt ceiling drama, and S&P 500 Q1 results.

This podcast is originally published by BFM 89.9 The Morning Run. Find it here: https://www.bfm.my/podcast/morning-run/market-watch/global-us-markets-debt-ceiling-april-2023

Tony Nash, CEO of Complete Intelligence, spoke to BFM about what is moving international markets.

The recent April headline CPI numbers were better than the projected 5%, coming in at 4.9%. However, core inflation still printed at 5.5%, and so the Fed is unlikely to cut, making it hard for them to stop raising interest rates. The Fed’s rate rise vote was unanimous this month, indicating that the Fed will continue to raise by 25 basis points in June. Tony said the Fed will look at wages and employment figures along with consumer sentiment, producer prices and credit indicators as well.

With regards to the debt ceiling, Tony said it was a US domestic political tool, and in the end, it would last longer than most people wanted it to last, and we would see some melodramatic brinksmanship.

85% of S&P 500 companies have reported actual results for Q1 2023 to date, and of these, 79% have reported actual EPS above estimates. Tony explained that a lot of this is down to margin expansion, and as raw materials prices fell, labor costs rose quickly, allowing companies to raise their prices further.

However, companies are starting to slow down on price rises as consumers are fatigued with the rises. Some tech companies have started laying people off or signaling no pay rises this year, as they realize pushing price rises is something they won’t be able to do much longer in 2023.

Transcript

BFM

This is a podcast from BFM 89.9, The Business Station.

BFM

BFM 89.9. Good morning. It’s 7:07 A.M. On Thursday the 10 May. You are listening to the Morning Run. I’m Shazana Mokhtar with Keith Kam and Mark Tan. Now in half an hour, we’re going to zoom in on the outlook for Chinese equity markets, specifically the Shanghai Composite and the Hang Seng Index. But let’s recap how global markets closed overnight.

BFM

In the US market, stocks mostly climb as better inflation data offset worries about the stalled talks between political leaders that have raised fears of a US default. The Dow was down 0.1%, but S&P 500 up 0.5%, and Nasdaq up 1%. In the Asian markets, it’s rate traffic lights Nikkei down 0.4%, Hang Seng down 0.5%, Shanghai Composite down 1.2%, STI down 0.2% and FBM KLCI down 0.5%.

BFM

So for some thoughts on what’s moving international markets, we have on the line with us Tony Nash, CEO of Complete Intelligence. Tony, good morning. Always good to have you. Let’s start with CPI numbers. April headline CPI numbers came in at 4.9%, better than the projected 5%. Do you think this will have an impact on the Fed’s policy decision in the near term?

Tony

Yeah, I think it’s unlikely by the next meeting. So what we have to look at is what’s called core inflation. And core inflation still printed at five and a half percent. And so that is hitting people enough that it’s really hard for the Fed to stop. They’re certainly not going to cut, but it’s really hard for them to stop raising when core inflation is still at 5.5%. So we have things like food inflation is still up 7.7% on an annual basis. Electricity is up over 8%. Transportation inflation is up 11%. So as these things are still rising at this rate, it’s really hard unless we see some other compelling data come in, it’s really hard to see the Fed either pause or cut. Now what we also have to recognize is the Fed’s rate rise vote was a unanimous vote in favor of a rate rise this month. Typically, before we see a change in policy, we’ll have votes that are not unanimous. So it seems to me that going into the June meeting, at this point, it’s likely the Fed will continue to raise by 25 basis points in June.

BFM

What are some of the other indicators that the Fed may be looking at in order to help refine this decision, Tony? What are you going to be watching coming out next in the weeks ahead of the June meeting?

Tony

Yeah, they’ll look at consumer sentiment, they’ll look at producer prices, they’ll look at wages, these sorts of things. They’ll look at employment. So the key things they’re looking at are really wages and employment. That’s really it. There are a number of other macro metrics that come out, like retail sales, that the Fed doesn’t really look at that stuff. So you don’t really hear markets here moving on retail sales. It’s more at this point in the cycle. It’s things like wages. They may also be looking at things like credit because we’re staring down, really a credit crunch, which is tight credit because rates have moved and because of the banking risks we’ve seen in the US over the past probably six to eight weeks. And so they may start looking at more credit indicators to see how that’s slowing down.

BFM

Now, US Treasury Secretary Janet Yellen has sounded alarm over possible financial market consequences if the debt ceiling was not raised by early June. What would those consequences be, and how likely would it be for Congress to strike a deal by then?

Tony

Yeah, I want to kind of help you guys and your listeners understand that the debt ceiling is really a US domestic political tool. Okay, so the debt ceiling is an annual ritual that we have here where each party threatens the other to cut programs, so say programs that the other party loves. Right. So at the end of the debt ceiling, all of the politicians just agree to spend anyway. So there will be threats that the US will run out of money, but it won’t. It’s not going to happen. The Treasury always finds money. You will likely see us get to some point where, for example, they’ll close national parks or they’ll say federal employees can’t come to work. Those are really signaling more than substantive because all of those employees get paid. We know that the debt ceiling will be signed three or four or five weeks after that happens, and all those employees get their back pay. It’s not as if anybody’s going hungry. They all have their health care while this is happening. So what will happen, and this is very predictable, and it’s a big eye-roll for most Americans. In the end, this will last a lot longer than any of us want it to last.

Tony

And we’ll see some sort of last minute melodramatic Brinksmanship to kind of save America. When we hear about the debt ceiling, we hear breathy headlines about the debt ceiling. Most Americans just kind of ignore it because this is really a Capitol Hill Washington, DC issue more than it is something that really affects real life here.

BFM

Tony, overall, 85% of S&P 500 companies have reported actual results for Q1 2023 to date. Of these companies, 79% have reported actual EPS above estimates. How would you explain this outperformance? Is it time to chill the bubbly?

Tony

Yeah. A lot of this is down to margin expansion. So in 2021 and 22, we saw goods price inflation, which allowed these companies to raise their prices a bit. As those raw materials prices fell, we saw labor costs rise quickly, and that allowed companies to continue raising prices further. So we’re starting to see companies slow down on their price rises. Consumers here are really fatigued with price rises, so we’re starting to see companies slow down. And some tech companies started this laying people off. Some will signal that there’s, say, no pay rises this year. Microsoft has already signaled that. Some of those are prudent measures that leadership teams are taking in the event of a recession. But some of them are just a realization that pushing price rises is just something that we won’t be able to do much longer in 2023.

BFM

And let’s take a look at oil prices, Tony, they’ve been pulled or they are being pulled in opposing directions. We have deteriorating global demand outlook that has been countered by some bullish supply news from the Biden administration as well as Russia. So where do you think oil prices might be heading in the next one to two months?

Tony

Yeah, you’re right. There are definitely mixed messages in crude markets and it’s easy to take either a bearish or a bullish view, depending on what data you’re looking at. Our view is that crude could rise 5% to 10% in the next month or two, and that’s a typical annual seasonal trend. After, say, June, maybe mid, late summer, we’ll definitely see a sell off in markets. Again, that’s pretty normal for this time of year. So we would expect prices to rally a little bit from here and then we’ll see a calm, say, mid summer.

BFM

Tony, I just want to pick your brains a little bit. Gold prices, they’ve managed to stay above $2,000 for some time after hovering like just below that level for the longest time that I can remember. What do you think the direction is going forward?

Tony

Yeah, so our expectation is that gold prices are going to fall a bit over the next two months back below 1900. So we do not expect gold to stay at these elevated levels. It’s possible, but it’s just not within our forecast. So I would be careful with gold at these levels. And if your listeners believe that it’s a rally, go for it. But that’s just not what our data is telling us.

BFM

1900 is quite substantial. What do you think the reason would be to bring it down to that level?

Tony

Well, if risk is taken out of the economy, so if there’s some systemic, say, relief that the Fed or Treasury gives for banks or something like that, investors typically go into gold and crypto when there’s risk, when they fear risk, or they feel devaluation of the dollar or something like that. Right. And so if there were to be programs to support banks, to backstop banks, these sorts of things, from the position that they’re in right now, I believe it would really turn a lot of that gold trade off. And so it’s quite possible that stuff’s happening because it is a concern with the government here and the government especially as we enter a tight credit cycle, they have to make sure that banks are stable. This is a real concern for them. If there isn’t confidence in the banking system, then you’ll see this domino effect of banks to firms and so on. That’s just one scenario, but it’s possible that some sort of federal backstopping of banks for a temporary period, I’ll say additional backstopping of banks will put the risk on trade back on.

BFM

All right, Tony, thanks very much for speaking with us. That was Tony Nash, CEO of Complete Intelligence, giving us his take on some of the trends that he sees moving markets in the days and weeks ahead.

BFM

I like what Tony said about the debt ceiling issue in the US. Right? That’s all political showmanship, and I guess here in Malaysia we’ll call it Wayang Kulit. Right.

BFM

So once all these shenanigans are over with the politicians who agree at Capitol Hill, and they’ll just continue spending their respective programs.

BFM

It’s nice to know that our politicians all over the world are just in it.

BFM

They’re the same. They have the same in a way. It doesn’t reflect well, though, and I think it does cause volatility, at least in the eyes of observers, regardless of what happens there. We’ll be watching that space, but let’s take our attention over to some of the earnings that have crossed our table. We have Walt Disney Company. They reported revenue and profit that were in line with Wall Street’s projections. The company did also reduce streaming losses by $400 million from the previous quarter. And this is thanks to price increases that helped offset the loss of 4 million subscribers at Disney Plus. So, on the one hand, they narrowed their losses, but they also lost subscribers.

BFM

So on the TV side of the business, disney’s direct to consumer segment, which includes the flagship Disney Plus streaming service, posted a loss of $659,000,000. However, this was significantly lower than the Street’s expectations. Right. The company plans to expand its streaming offerings by the end of the year with a new app that combines Disney Plus and Hulu.

BFM

And on the theme park site and Parks Experiences and Products division remains a bright spot for Disney. This saw a 17% increase in revenue to $7.7 billion during the most recent quarter. But I have to point out as well, disney movies, especially with their new live action version of their animation movies, haven’t been actually doing well. The Little Mermaid is coming out on May 26, and there’ll be something interesting to see if you just glean through social media.

BFM

It’s a bit controversial.

BFM

It is controversial, to say the least.

BFM

I think a lot of the live action films have been the subject of controversy in some form or another. I tend to be of the old school.

BFM

Yeah, me too.

BFM

Feeling. I mean, I like the cartoons. I’ll stick with the cartoons, thanks. But they’re trying to court a whole generation of younger viewers with their live action films. So I guess time will tell whether everything will pay off. Don’t forget that Disney is facing a number of challenges ahead. They’ve got their federal lawsuit against Florida Governor Ron DeSantis, and the writer strike is still ongoing. That is going to have an effect on some of the production that is stalled, such as with Blade and also the Disney Plus Star Wars series. Andor so all these things to watch when it comes to Disney Plus. We are coming up to 720 in the morning. We’re taking a quick break, but we’ll come back with more top stories in the newspapers and portals. Stay tuned. BFM 89.9 you have been listening to.

BFM

A podcast from BF M 89.9, the business station. For more stories of the same kind, download the VFM app.