You're listening to Strictly Business Podcast with Lindsay Williams.
A number of central banks are meeting in the next few days to set their domestic
monetary policies.
With me now is Jason Borbersheen, Portfolio Manager at 91 in London.
Jason, we've got the US Federal Reserve, the ECB, Bank of England and Bank of Japan
notably,
and they're all sort of facing differing domestic problems, but one very impactful
common problem.
is right out there.
It's the war on Iran.
So it's very tricky times for our central bankers as they prepare to huddle.
Absolutely, yes.
I mean, I think this is now a little bit of a theme for the world's central banks
over the 2021 through to 26
period, which is that as soon as they appear to have themselves on track for a
course,
something geopolitical or otherwise comes out of the woodwork and steers them away
from it.
Yeah, maybe we should be...
methodical and start with the biggest central bank, and that's the US Federal
Reserve.
Now, if you look at the factors that they've got to look at, I mean, just the
ones in the headlines, potential US jobs recession,
some people say it's already a recession, growth suddenly not quite as good as Mr.
Trump wants, inflation is under control, but maybe not for long because it's likely
to spike as energy prices soar.
So all these things in the mix, and it looks suddenly as though they might not
cut rates.
as frequently as people want in 2026.
So let's take it through that lens of the growth and inflation mix that's required
for the
Federal Reserve or most other central banks to feel inclined to act in either
direction, so either to tighten or to ease policy.
Prior to the Iranian conflict,
I think there was a mosaic of factors in place which was prompting the Fed's
pricing of future rate
actions to be much more easy.
And it's slightly technical,
but what we were seeing in the pricing of interest rates by markets was an
expectation that the Federal Reserve
were not necessarily imminently going to act, by that I mean in 2026,
but were starting to be priced to act from 2027 and onwards to be much more
facilitative of easy policy.
And that appeared to coincide with the rise of concerns around unemployment.
from AI in the future.
And so there was a dynamic underway in which essentially inflation data was
appearing fairly benign.
Perhaps the strongest of the disinflationary impulses was coming to an
end as some of the most recent data
has been showing, but still allowing the Fed perhaps to ease.
There was this concern around the jobs market, maybe not occurring in the
immediate near term,
but occurring at some point over the next couple of years that all conspired to mean
that the Fed was being
priced to go more easy.
And this was then reflecting in bond yields towards the end of February,
falling and declining by quite a meaningful amount.
That has reversed significantly.
Partly, it's now the idea that actually the future rate cuts were being taken out
and the near term, actually,
some probability of a potential hike needs to go in there.
That's not to say that there is a hike priced, but Markets are continuously
trying to price the distribution of probabilities.
And it's that distribution which has meaningfully changed with the Iranian
conflict.
And it sets the backdrop for all of the world's central banks.
There's a lot of people that might say that this is just a brief moment in time.
You know, as Mr.
Trump says, it's just an excursion.
And Israel has said, well, maybe it's another three weeks.
Maybe it's less, according to the U.S.
administration.
So all sorts of ideas out there.
you the potential spike in inflation might be just that, a moment in time,
and the central bank might just look through that.
And also, of course, we've got the change of personnel right at the top.
Do either of those factors come into the equation as well, Jason?
Yes, I think there's two parts to that question, Len.
There's the first of whether this will prove transitory and at the risk of
looking too
far through what is a very difficult situation.
I would think that the paradigm of the past,
whereby most of the conflicts resolve themselves and therefore do show up as a
bump rather than a protracted
hill, is the base case.
But the difficulty then is the willingness of the central banks to adopt that
approach.
And the experience from 2022's Russia-Ukraine conflict has, I think,
changed the mindset,
certainly for a bank like the European Central Bank, quite meaningfully.
and it led to a review of their policymaking stance and the need to be a
bit more proactive rather than reactive, i.e.
don't be willing to think of things as transitory and try to look to react to
them.
And the most recent speak out of the ECB confirmed some willingness actually to
tighten policy,
despite the fact that.
Employment data in, for example, Europe is looking much worse.
So I think there is perhaps this risk that the World Central Bank's proved more
reactive,
but I do think that's going to vary bank by bank.
I think, for example, in the UK, there is a much weaker employment situation than
there was in 2022,
and growth is not showing signs of meaningful re-acceleration prior to this
conflict arising,
and therefore there's much less willingness to hike in that sort of
country.
So we're going to get a different reaction function from different banks, despite
that common driving factor.
What about, as I said, the change of personnel at the Fed?
Is he going to be under pressure, the new Fed chair, politically to cut rates?
Mr.
Trump, again, has been very vociferous, actually, about slashing rates straight
away, maybe because of the war,
maybe because of the war's effect on U.S. growth.
What do you think about that?
I think clearly anyone selected by the US.
administration, given the focus that they've had on the desire for lower rates,
would likely be inclined to think that way.
It would be very surprising to find that Mr Walsh doesn't believe that rates should
be lowered.
However, you are dealing with an institution which is very robust,
you would need to remove the remainder of the committee.
And a lot of the speak more recently from the Fed has been on the more hawkish side.
So I think that even if he is that way inclined,
If the mix of factors in the backdrop is not facilitative of lower rates, that
won't be the approach that the
Federal Reserve will take, or even if they do, it would only be a one-off action
that's then needing to be reversed.
So it, to me, suggests that ultimately the Fed is still a very robust institution,
that it can't be strong-armed by one individual, and that actually the mix of
factors is going to be the determinant for them,
and that's become less likely of easing in the immediate time.
What about going around the corner from your office to the Bank of England?
How does the Bank of England look at the situation?
There's a lot of interesting politics in the background, but they can try and shut
themselves away from that.
What are they going to do?
I think the difficulty for the bank is that ultimately in the UK there is a heavy
reliance on gas prices and
they are in a less beneficial situation than they were at the start of the year.
At the start of the year it seemed that the mix of factors for the bank to go
towards easing were very strong.
So lots of employment data looking like the country needed a bit more support.
Inflation data was broadly coming more in line with where the bank would have wanted
to see it to be to ease,
although not moving there very quickly.
And then they've had this shock move from energy prices.
Then there's going to be some reaction through government policies, we've heard,
to try and cap the impact of that on individuals.
But I think nevertheless, it may cloud the outlook in the short term.
But where the markets probably got it wrong is pricing the idea that the bank is
going to need to hike rates.
I think the bank is showing themselves as very willing to wait to respond.
I think that's where they'll put themselves in this current meeting, but
their desire, their inclination is towards easing policy.
So I think that gets taken out and then the bank actually goes back towards an
easing stance as and when the conflict seems to
resolve itself or as markets become perhaps more comfortable with which
dynamics actually matter.
from this conflict and how they're going to feed through in terms of the balance of
inflation and growth.
And that's one of the big, I think, dynamics that's been notable since the
start of the conflict is that interest
rate markets and bond markets have spent a lot of time repricing the inflationary
impact of the conflict.
Little is priced from a negative growth perspective.
And actually, a lot of other risk assets have failed to look at the inflation or
the growth impacts at all.
In some ways, it's been quite benign so far.
So there is, I think,
that scope for rate pricing to come back in as and when the conflicts end seem more
palpable.
How much do the central bankers look at the markets?
I mean, I'm talking about the currency markets at the moment.
You look at the dollar index, it's above 100 as we speak to each other.
And you've got the euro dollar going from broadly 119 down to around 114.
That must have an influence, Jason.
Absolutely.
No, I think they look very closely at all kind of asset markets and there's vast
amounts
of evidence from the empirical to the narrative base that they are doing that.
I think that the currency move probably doesn't impact them enormously currently.
I think what probably does cause the attention to be picked a little more is
the move in rate expectations.
So central bankers tend to be aware of what is priced and expected of them from
rates markets as they go into
meetings.
And unless there's a strong desire to push against the future pricing,
they tend not to want to surprise that narrative enormously.
And so that is probably going to be the thing that's more front of mind.
I think the currency moves, they're possibly disinflationary for the US in the
medium term.
They may be slightly more inflationary for Europe.
in the short to medium term, given that the euro has been depreciating throughout
this crisis.
But if you stand back over the last year or so,
we have been in this very significant dollar depreciation dynamic since
Liberation Day.
And so that's probably the more impactful backdrop than the shorter run moves we've
had.
What about portfolio managers?
We're talking a lot about central bankers, but portfolio managers like yourself must
be looking with a great deal of interest
to what's going to happen over the next few days.
Have you started to tweak a little bit ahead of the meetings?
In all honesty, not really.
So I think the interesting thing about the conflict so far is that the reaction from
a lot of asset markets has been
fairly benign.
So the intraday action can be incredibly volatile.
But the end of day or day to day has actually not been so dramatic.
So we have some asset classes down, you know, mid single digits or less.
If we look at the S&P for the year.
We have US treasuries and global government bond markets roughly flat for
the year in total return terms.
And so sentiment is, I think, quite depressed when we look at various measures
of survey.
But there's this detachment from the level of pessimism to the price levels,
where normally when you have this sort of degree of geopolitical shock and you have
this degree of negative sentiment appearing in those surveys,
you'd have suffered or seen a much more meaningful drawdown.
Certainly on risk assets.
And so back to that previous point that some assets such as rates markets are
reacting more than others, such as equities,
it's quite a divergent place that's ended with not very much actually happening.
So we've undone some of the cuts that were priced for the Fed in the first couple of
months,
but it hasn't led to a much more meaningful repricing of treasuries.
And we've seen risk assets hit the headlines, but not actually get hit very
hard on price terms.
So the things that we have been doing...
leaning back into some of those assets where it feels disproportionate in terms
of the pricing.
So we mentioned things like the gilt market, where this expectation that the
bank will actually start to hike rates,
we think it's unlikely that they do that.
And therefore, there is that asymmetry in those assets.
But more broadly, it's not yet a series of markets where you're seeing massive
pessimism or euphoria being priced.
Jason, thanks so much for your insight.
Jason Borber-Sheen is a portfolio manager at 91 in London.
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