Here, I know you're a bonds guy, but can you maybe, just maybe tell us what the
heck is going on with these markets right now?
When I see it, inflation print so hot in the US.
Why are we seeing a risk rally right now?
Yeah, good morning, so indeed, the inflation print from from last night in
the US did show that inflation was quite hot.
Obviously Europe was 6 percent months and more for core is is definitely very
elevated. I do think that it wasn't all doom and
gloom to some extent, so maybe that explains some of the rally that we see.
I mean, if you look a little bit under the hood, it showed that potentially
inflation, inflation is stabilizing at a high level, but stabilizing nonetheless,
or at least that it's not going going even higher or that prices aren't
becoming an anchored. I also think the consumer, the core
goods numbers are flat month and months were actually reassuring that this
transition from goods inflation to services inflation is actually happening
as expected. And finally, really the high number that
the breakout number was shelter inflation.
But we know that there's always a bit of a lag in the way that the let's
calculate shelter inflation. So in a way, it kind of reflects changes
in housing prices, in rent prices from 6 or 12 months ago.
So so so maybe there's there's some there's some for everyone in that
report. If you look at this, how will the Fed
interpret these numbers? I mean, it probably just adds to the
more grist for the mill for them, isn't it?
Yeah, absolutely. I mean, this is this is not what the Fed
is looking for in terms of being able to pivot to a more dovish monetary policy.
They want to see some decisive and forceful
indicated indication that inflation is moving down.
And that's not what we got yesterday. I do think it probably means that rates
are going to stay higher for longer. And and that the Fed reserve, again, is
going to have to do jumbo rate hikes in November and in December.
I think after that is when it gets interesting, when interest rates are at
four and a half, five percent and maybe inflation is still relatively sticky,
what does the Fed do then? Hopefully they won't continue to blindly
increase interest rates because that would really increase the chances of a
hard landing in the US. You mentioned there might be some pay
for everything and everyone in this inflation print.
But it also raises a lot of questions about, you know, how important the macro
is in determining investment decisions now.
Do you think the market can build on this rally moving forward or do you
think the shorts, they're just going to keep establishing your positions at
higher levels? What's your take on what comes next?
I think ultimately that that over the long term, over the medium term, I do
think fundamentals and the macro is important.
I think inflation data, labor data, economic data in the US is
going to be of the utmost of the utmost importance over this over the next six
months. That being said, if you look at fixed
income, my asset class, I think there are reasons to be more constructive
nowadays. And even though even if interest rates
stay higher for longer. I think a lot of the adjustment has
already happened in bond markets. Yes, absolutely.
You know, when you have a look at these bond markets are big corporate or
sovereign debt. Are you looking perhaps at some of those
investment grade corporate bonds which have probably fallen back into the high
yield campaign? Where do you find quality and high yield
and how do you forgive me for things that separate the wheat from the chaff?
That. Yes, so we would agree with that.
With that point, investment grade corporate bonds or maybe triple B rated
corporate bonds or even higher quality high yield corporate bonds are now
looking interesting again. I think even if you do get a mild or
potentially severe recession than us, those types of companies that make up
these these indices have tended tended to be very resilient, even even in past
economic downturns, downturns. So we do think that the downside is
limited. And again, just because of the carry or
if we get some positive news on inflation or if maybe growth falls down
a little bit quicker than anticipated in the US, you could see yields come down
and therefore you could generate substantial returns for investing in
that asset class asset. What are your contrarian views?
As I saw, is is UK ISE credit up? Maybe you could walk us through the
thinking behind that and why anyone would want to touch UK assets just given
just the multiple U turns we've seen when it comes to this budget.
Yes, you're right. Volatility has increased quite
substantially. In your case, assets ever since that the
mini budget announcement on the twenty third of September.
To be honest, the sell off has been has been quite severe.
And we actually think that again, in the more resilient, high quality UK
companies, those maybe with international exposures, banks as well,
financials we think are well capitalised and relatively robust.
So there could be opportunities in the UK bond markets.
Again, given the sharp correction that we've seen over the last two weeks,
I want to get a sense of what you made, of what the underbelly has been doing at
the Bank of England, because it does seem as though this is a gamble to end
this buying program Friday. I eat today, later today.
What do you make of that? And do you think he did the right thing?
I think the Bank of England needs a will has the it is obligated to stick to
their their stance, which is this is an emergency intervention.
This is not QE again. We are not financing the budget deficit
of the UK government. We have just stepped in because there
were significant threats to financial stability and that's their position.
And of course, hopefully they don't want to intervene again next week or
subsequently they hope that market forces can regulate government.
UK gilt yields on their own. And that's their positioning and that's
their talk. But to be honest, if gilt yields
increase again and are a threat further and threat threats and further financial
stability in the UK, the Bank of England will have to intervene intervene at some
point in the future.