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You're listening to Strictly Business
Podcast with Lindsay Williams.

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A number of central banks are meeting in
the next few days to set their domestic

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monetary policies.

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With me now is Jason Borbersheen,
Portfolio Manager at 91 in London.

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Jason, we've got the US Federal Reserve,
the ECB, Bank of England and Bank of Japan

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notably,

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and they're all sort of facing differing
domestic problems, but one very impactful

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common problem.

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is right out there.

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It's the war on Iran.

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So it's very tricky times for our central
bankers as they prepare to huddle.

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Absolutely, yes.

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I mean, I think this is now a little bit
of a theme for the world's central banks

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over the 2021 through to 26

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period, which is that as soon as they
appear to have themselves on track for a

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course,

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something geopolitical or otherwise comes
out of the woodwork and steers them away

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from it.

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Yeah, maybe we should be...

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methodical and start with the biggest
central bank, and that's the US Federal

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Reserve.

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Now, if you look at the factors that
they've got to look at, I mean, just the

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ones in the headlines, potential US jobs
recession,

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some people say it's already a recession,
growth suddenly not quite as good as Mr.

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Trump wants, inflation is under control,
but maybe not for long because it's likely

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to spike as energy prices soar.

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So all these things in the mix, and it
looks suddenly as though they might not

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cut rates.

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as frequently as people want in 2026.

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So let's take it through that lens of the
growth and inflation mix that's required

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for the

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Federal Reserve or most other central
banks to feel inclined to act in either

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direction, so either to tighten or to ease
policy.

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Prior to the Iranian conflict,

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I think there was a mosaic of factors in
place which was prompting the Fed's

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pricing of future rate

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actions to be much more easy.

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And it's slightly technical,

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but what we were seeing in the pricing of
interest rates by markets was an

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expectation that the Federal Reserve

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were not necessarily imminently going to
act, by that I mean in 2026,

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but were starting to be priced to act from
2027 and onwards to be much more

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facilitative of easy policy.

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And that appeared to coincide with the
rise of concerns around unemployment.

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from AI in the future.

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And so there was a dynamic underway in
which essentially inflation data was

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appearing fairly benign.

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Perhaps the strongest of the
disinflationary impulses was coming to an

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end as some of the most recent data

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has been showing, but still allowing the
Fed perhaps to ease.

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There was this concern around the jobs
market, maybe not occurring in the

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immediate near term,

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but occurring at some point over the next
couple of years that all conspired to mean

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that the Fed was being

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priced to go more easy.

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And this was then reflecting in bond
yields towards the end of February,

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falling and declining by quite a
meaningful amount.

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That has reversed significantly.

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Partly, it's now the idea that actually
the future rate cuts were being taken out

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and the near term, actually,

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some probability of a potential hike needs
to go in there.

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That's not to say that there is a hike
priced, but Markets are continuously

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trying to price the distribution of
probabilities.

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And it's that distribution which has
meaningfully changed with the Iranian

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conflict.

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And it sets the backdrop for all of the
world's central banks.

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There's a lot of people that might say
that this is just a brief moment in time.

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You know, as Mr.

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Trump says, it's just an excursion.

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And Israel has said, well, maybe it's
another three weeks.

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Maybe it's less, according to the U.S.

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administration.

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So all sorts of ideas out there.

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you the potential spike in inflation might
be just that, a moment in time,

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and the central bank might just look
through that.

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And also, of course, we've got the change
of personnel right at the top.

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Do either of those factors come into the
equation as well, Jason?

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Yes, I think there's two parts to that
question, Len.

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There's the first of whether this will
prove transitory and at the risk of

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looking too

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far through what is a very difficult
situation.

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I would think that the paradigm of the
past,

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whereby most of the conflicts resolve
themselves and therefore do show up as a

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bump rather than a protracted

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hill, is the base case.

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But the difficulty then is the willingness
of the central banks to adopt that

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approach.

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And the experience from 2022's
Russia-Ukraine conflict has, I think,

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changed the mindset,

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certainly for a bank like the European
Central Bank, quite meaningfully.

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and it led to a review of their
policymaking stance and the need to be a

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bit more proactive rather than reactive,
i.e.

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don't be willing to think of things as
transitory and try to look to react to

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them.

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And the most recent speak out of the ECB
confirmed some willingness actually to

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tighten policy,

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despite the fact that.

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Employment data in, for example, Europe is
looking much worse.

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So I think there is perhaps this risk that
the World Central Bank's proved more

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reactive,

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but I do think that's going to vary bank
by bank.

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I think, for example, in the UK, there is
a much weaker employment situation than

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there was in 2022,

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and growth is not showing signs of
meaningful re-acceleration prior to this

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conflict arising,

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and therefore there's much less
willingness to hike in that sort of

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country.

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So we're going to get a different reaction
function from different banks, despite

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that common driving factor.

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What about, as I said, the change of
personnel at the Fed?

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Is he going to be under pressure, the new
Fed chair, politically to cut rates?

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Mr.

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Trump, again, has been very vociferous,
actually, about slashing rates straight

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away, maybe because of the war,

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maybe because of the war's effect on U.S.
growth.

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What do you think about that?

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I think clearly anyone selected by the US.

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administration, given the focus that
they've had on the desire for lower rates,

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would likely be inclined to think that
way.

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It would be very surprising to find that
Mr Walsh doesn't believe that rates should

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be lowered.

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However, you are dealing with an
institution which is very robust,

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you would need to remove the remainder of
the committee.

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And a lot of the speak more recently from
the Fed has been on the more hawkish side.

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So I think that even if he is that way
inclined,

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If the mix of factors in the backdrop is
not facilitative of lower rates, that

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won't be the approach that the

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Federal Reserve will take, or even if they
do, it would only be a one-off action

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that's then needing to be reversed.

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So it, to me, suggests that ultimately the
Fed is still a very robust institution,

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that it can't be strong-armed by one
individual, and that actually the mix of

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factors is going to be the determinant for
them,

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and that's become less likely of easing in
the immediate time.

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What about going around the corner from
your office to the Bank of England?

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How does the Bank of England look at the
situation?

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There's a lot of interesting politics in
the background, but they can try and shut

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themselves away from that.

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What are they going to do?

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I think the difficulty for the bank is
that ultimately in the UK there is a heavy

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reliance on gas prices and

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they are in a less beneficial situation
than they were at the start of the year.

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At the start of the year it seemed that
the mix of factors for the bank to go

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towards easing were very strong.

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So lots of employment data looking like
the country needed a bit more support.

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Inflation data was broadly coming more in
line with where the bank would have wanted

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to see it to be to ease,

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although not moving there very quickly.

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And then they've had this shock move from
energy prices.

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Then there's going to be some reaction
through government policies, we've heard,

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to try and cap the impact of that on
individuals.

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But I think nevertheless, it may cloud the
outlook in the short term.

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But where the markets probably got it
wrong is pricing the idea that the bank is

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going to need to hike rates.

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I think the bank is showing themselves as
very willing to wait to respond.

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I think that's where they'll put
themselves in this current meeting, but

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their desire, their inclination is towards
easing policy.

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So I think that gets taken out and then
the bank actually goes back towards an

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easing stance as and when the conflict
seems to

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resolve itself or as markets become
perhaps more comfortable with which

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dynamics actually matter.

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from this conflict and how they're going
to feed through in terms of the balance of

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inflation and growth.

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And that's one of the big, I think,
dynamics that's been notable since the

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start of the conflict is that interest

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rate markets and bond markets have spent a
lot of time repricing the inflationary

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impact of the conflict.

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Little is priced from a negative growth
perspective.

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And actually, a lot of other risk assets
have failed to look at the inflation or

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the growth impacts at all.

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In some ways, it's been quite benign so
far.

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So there is, I think,

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that scope for rate pricing to come back
in as and when the conflicts end seem more

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palpable.

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How much do the central bankers look at
the markets?

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I mean, I'm talking about the currency
markets at the moment.

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You look at the dollar index, it's above
100 as we speak to each other.

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And you've got the euro dollar going from
broadly 119 down to around 114.

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That must have an influence, Jason.

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Absolutely.

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No, I think they look very closely at all
kind of asset markets and there's vast

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amounts

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of evidence from the empirical to the
narrative base that they are doing that.

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I think that the currency move probably
doesn't impact them enormously currently.

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I think what probably does cause the
attention to be picked a little more is

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the move in rate expectations.

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So central bankers tend to be aware of
what is priced and expected of them from

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rates markets as they go into

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meetings.

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And unless there's a strong desire to push
against the future pricing,

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they tend not to want to surprise that
narrative enormously.

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And so that is probably going to be the
thing that's more front of mind.

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I think the currency moves, they're
possibly disinflationary for the US in the

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medium term.

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They may be slightly more inflationary for
Europe.

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in the short to medium term, given that
the euro has been depreciating throughout

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this crisis.

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But if you stand back over the last year
or so,

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we have been in this very significant
dollar depreciation dynamic since

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Liberation Day.

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And so that's probably the more impactful
backdrop than the shorter run moves we've

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had.

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What about portfolio managers?

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We're talking a lot about central bankers,
but portfolio managers like yourself must

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be looking with a great deal of interest

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to what's going to happen over the next
few days.

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Have you started to tweak a little bit
ahead of the meetings?

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In all honesty, not really.

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So I think the interesting thing about the
conflict so far is that the reaction from

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a lot of asset markets has been

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fairly benign.

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So the intraday action can be incredibly
volatile.

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But the end of day or day to day has
actually not been so dramatic.

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So we have some asset classes down, you
know, mid single digits or less.

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If we look at the S&P for the year.

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We have US treasuries and global
government bond markets roughly flat for

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the year in total return terms.

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And so sentiment is, I think, quite
depressed when we look at various measures

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of survey.

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But there's this detachment from the level
of pessimism to the price levels,

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where normally when you have this sort of
degree of geopolitical shock and you have

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this degree of negative sentiment
appearing in those surveys,

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you'd have suffered or seen a much more
meaningful drawdown.

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Certainly on risk assets.

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And so back to that previous point that
some assets such as rates markets are

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reacting more than others, such as
equities,

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it's quite a divergent place that's ended
with not very much actually happening.

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So we've undone some of the cuts that were
priced for the Fed in the first couple of

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months,

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but it hasn't led to a much more
meaningful repricing of treasuries.

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And we've seen risk assets hit the
headlines, but not actually get hit very

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hard on price terms.

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So the things that we have been doing...

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leaning back into some of those assets
where it feels disproportionate in terms

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of the pricing.

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So we mentioned things like the gilt
market, where this expectation that the

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bank will actually start to hike rates,

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we think it's unlikely that they do that.

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And therefore, there is that asymmetry in
those assets.

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But more broadly, it's not yet a series of
markets where you're seeing massive

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pessimism or euphoria being priced.

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Jason, thanks so much for your insight.

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Jason Borber-Sheen is a portfolio manager
at 91 in London.

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The views and opinions expressed in these
podcasts are those of Lindsay Williams and

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various contributors and do not reflect
the policy,

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position or opinion of any other agency,
organisation,

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employer or company associated with
StrictlyBusinessPodcast.com.

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Assumptions made on the analyses are not
reflective of the position of any other

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entity other than the speaker or the
author.

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And since we are critically thinking human
beings, these views are always subject to

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change, revision, and revision.

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and rethinking at any time.

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Please do not hold us to them in
perpetuity.
