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The spread between the 2-year and 10-year US treasuries has widened with markets saying that a Powell recession is here. We speak to Tony Nash, CEO of Complete Intelligence as to whether he agrees. We also ask him if the recent aggressive job cuts by the tech and now finance sector will be part of the Federal Reserve’s decision-making process at the next FOMC meeting.
Transcript
BFM
This is a podcast from BFM 89.9. The Business Station. The World Market Watch is brought to you by CMB Preferred.
BFM
BFM 89.9. 7:06 Thursday, eight of December. And of course, you’re listening to the Morning Run with Chong Tjen San and I’m Wong Shou Ning. But in the meantime, let’s recap how global markets closed yesterday.
For US markets, the Dow closed flat, the S&P 500 was down by 0.2%. It’s the fifth consecutive day of declines and the Nasdaq was down 0.5%. In Asian markets, they were all in the rip. Nikkei was down 0.7%, Hang Seng was down 3.2%, the Shanghai Composit was down 0.4%, the Straits Times Index was down 0.8% and the FBM KLCI was down 0.3%.
So joining us on the line to tell us where markets are heading, we have Tony Nash, CEO of Complete Intelligence. Good morning, Tony. Always good to speak to you. I want to start with Treasuries for a change, and the two-year and ten-year treasury rate spread is currently very wide. Is the bond market already telling us that a Powell recession is here?
Tony
Well, yeah, I think that’s part of it. I think that’s contributed to a lot of the discussion around the kind of perceived inevitability of a recession in 2023. And what we’ve been saying for months is we’re already there. We already saw negative GDP numbers in the US in the first two quarters of this year. The holdout is jobs. And now that we’re starting to see, some say, turnover in the jobs front, meaning it’s still strong, but it’s not as strong as it was two months ago, there is a feeling that we’re definitely headed in that direction.
BFM
And Tony, I like to tap your expertise on all market. The market is quite divided as to what the G7 price cap and the EU ban on Russian seabourn all will do to oil prices and crude supplies in the coming months. Can you give us some insights?
Tony
Yeah. So what’s happening actually today, Xi Jinping landed in Saudi Arabia for a meeting with GCC leads and Saudi Arabian government. So what’s happening in the oil market is the OPEC countries are being very open about the fact that China is the main price setter for global oil markets. And that really is kicking off with that meeting in the Middle East today. That’s been known for some time, but it hasn’t been as explicit and overt as it is today. We’re seeing more supply with things like Venezuelan crude coming on for the US. But we’re also seeing the price cap for Russia and which we know, pretty much know won’t work. Europeans will find a way to circumvent it, Russians will find a way to get crude on the market. And so that’s why we’re seeing weakness in crude prices.
BFM
But at the same time, Tony, we are seeing more positive news coming out of China. They are easing a range of COVID restrictions, including allowing people to quarantine at home rather than in centralized camps, suggesting that the economy is slowly easing out of the Zero COVID policy. Shouldn’t that be a reason for all prices to go up then?
Tony
Well, I think it will. And if you look at futures I looked a few days ago and a few months out, there’s definitely expectations for higher oil prices. But right now, if we’re looking at spot markets, there really isn’t that much expectation of things moving. So when you look beyond February, for example, there is an expectation that China opens. And yes, that is very positive for crude prices and that is one of the most important economic events in the world. We’re waiting for it, we all need it, whether you’re in Asia or the US or Europe. China opening is good for everybody, but it will be positive commodity prices and it will push those prices up.
BFM
Okay. How else can we position for this eventual reopening in terms of our portfolio? What should we be looking at?
Tony
Well, if we look at things like industrial metals, like copper, we’ve seen some really interesting action copper over the past few days on expectations of China opening up. Over the past, say, probably three or four days, we’ve seen some interesting action in Chinese tech and there’s expectation that Chinese tech and consumer goods will be very positive in the coming months. So we’re seeing that in equity prices right now. So those are some areas that I would look at and be paying attention to because they’ve already proven to have some positive traction. But that will likely improve as China’s opening accelerates.
BFM
And Tony still sticking to the topic of oil and energy commodities, the UK instituted a windfall tax on oil and gas recently. Why have they decided to go down that route? And what effect will that have on energy companies with major investments there?
Tony
Yeah, this came right after the COP meeting and it was a very populist move by the UK government, very populous move by the UK government. It didn’t make any sense commercially and it doesn’t make any sense in terms of energy strategy. We’ve already seen companies like Total and Shell pull back on announced investments that they plan to make in the UK and it’s already making energy prices higher in the UK. So I think the UK government’s calculation there was, we’re going to make a populist move and get some voters behind us, but it was really a really stupid move and they’re going to have to do an about face on that within a few months.
BFM
Okay, let’s talk about job cuts or the possibility of it. Yesterday we saw a raft of top US bankers warning of layoffs and freezing when it comes to hiring. What does this then mean for the US labor market?
Tony
We already saw this start in tech a couple of months ago and it’s just kind of cascading out to other industries. Right. And so first they announced job freezes. Then they announced job cuts, usually, right? And it’s in things like in banks, it starts in mortgages because house buying has slowed. And it’ll go into other areas, of course. And we’ve seen this in media, too, with BuzzFeed, and there are issues at other media companies because they’re having to compete in those CPM rates, meaning those advertising rates are declining because places like Facebook and Netflix and other places are getting more competitive on advertising. So it just means that companies have to get more productive.
So whether they’re tech companies or banks or media firms, companies are having to get more productive. What we saw through COVID generally, was margin expansion for companies. A lot of companies profits through, say, mid 2020 continued to expand because companies didn’t have to pay for certain things, but they could charge higher prices because people were working from home. They didn’t have to pay for certain things, but yet they could charge higher prices. What we’re seeing now is with wages rising as fast as they are and staying there, companies are having to pay more all around.
And the markets like mortgages or advertising or tech or whatever, they’re not where they were a year ago. So they’re having to cut heads. And you look at Facebook cutting like 13, 14% of their workforce. Look at what these other guys are doing. They’re realizing they’re way overstaffed given where we’re going in 2023.
BFM
Okay, so how does this then inform the Fed decision when they meet this month for the FOMC meeting? Because employment is another indicator that they watch is part of their twin mandate, isn’t it?
Tony
It is. It’s one of their mandates. So there are a couple of things that I’m watching. So first, last week we saw the jolts. This is the job openings, okay? And with jolts, we saw that really turn over, meaning the job openings has declined. Now, it’s still strong, but it’s really turned over in terms of we’re not the highest anymore. That was probably two months ago. So we’re starting to see a decline in the number of job openings and the rate of growth of job openings. And when you look at the employment data that came out, the strength in jobs is really in, say, lower level services and health care. Okay? So it’s not necessarily in the higher level, higher earning jobs as it was, say, a year ago. So we’re seeing I’m sorry to put it this way, but kind of lower quality jobs come through, and that’s when we can tell that it’s weakening. Those are the last to be strong before going into recession. They’re the first to be strong as you’re coming out of it. So what is the Fed looking at? Well, Powell talked about the lag effects of monetary policy at his Brookings speech last week.
And so I think the Fed is being really sensitive to the lag effects of their policy, and they’re likely going to still go with 50 basis points this month and next month.
BFM
All right, thank you very much. That was Tony Nash, CEO of Complete Intelligence, telling us at least forecasting what the Fed is going to do at the next FOMC meeting.
But very quickly, I want to talk about one stock that was really a bit of a COVID pandemic winner, and that is Gamestop. So their fiscal third quarter sales declined while its cash pile sharply dwindled as the brick and mortar retailer had been working to expand its digital presence. Now, for no reason, this stock actually went up. A lot to do with retail investors who just wanted to like, very bullish on this counter. But although the fundamentals weren’t great, there.
Was a documentary on this Gamestop, actually on Netflix. I watched. It was really interesting. So if you’re interested to see what really happened and how they actually lure retailers in and the retail battle between institutional investors and all the renowned hedge funds and how retailers actually trumped in the end, but maybe not in the end, for the moment, it is actually a very interesting documentary or show to watch on Netflix.
Well, because it’s one of those odd stocks, there isn’t much coverage. There’s actually three analysts, they all have a sell on this. Target price is $6. This morning. During regular hours, the stock was actually down one dollars and $0.13 is $22.26. And if you’re wondering whether who won in the end, don’t think the retailers won because on a year to date basis, the stock is down 40%. But up next, we’ll cover the top stories in the newspapers and portals. Stay tuned for that. BFM 89.9 the world market watch, is.
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