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The Asset Class: John Stopford · Strictly Business Podcast

• 0:00
  You're listening to Strictly Business Podcast with Lindsay Williams.
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  The US Federal Reserve has left US interest rates unchanged for the fifth
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  straight meeting.
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  With me now is John Stockford, head of multi-asset income at 91 in London.
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  It was a split decision though, not a split decision, it was 25% wanted a hike,
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  25% of the FOMC
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  that is.
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  Yes, yeah, I mean on the face of it, it's a sort of non-event, but actually it was
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  a...
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  relatively consequential.
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  So as you say, there were three dissents, which is quite a large number of people
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  who were voting
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  against the main resolution.
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  Even though rates were unchanged, we had some quite dramatic market moves.
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  And I think basically, the bond market and markets in general are trying to
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  understand the
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  new Kevin Walsh Fed, which is rather different from that of his recent
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  predecessors.
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  Yes, talking about market reaction, the first thing that happened was absolutely
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  nothing.
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  And then suddenly people read the statements and the bond market started to
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  fall.
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  In other words, yields rising, the stock market came back and the dollar weakened.
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  And that has continued on the morning after as well.
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  He did say a few interesting things.
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  The first thing was a general statement.
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  He says the economy is showing impressive resilience, but he also talked about high
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  uncertainty.
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  So there was lots to take in there.
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  What was your...
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  overall impression of what he said, because he doesn't give guidance anymore.
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  You give us guidance, please.
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  Well, I think the lack of guidance is the problem.
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  It leaves the markets confused.
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  So in the statement, as you said, they talked about the resilience of the
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  economy.
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  They talked about inflation being too high.
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  And yet they did nothing.
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  And the market went in with an unusually split sort of probability of would they or
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  wouldn't they?
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  They clearly didn't but A lot of what he said, I think he didn't give guidance, but
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  it did confuse the market.
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  So one of the things he said is we didn't perhaps need to tighten because the market
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  had done some tightening for us
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  because yields had risen.
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  But clearly the market actually sort of felt, you know, is he basically backing
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  away from delivering on his
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  inflation target?
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  In addition, he sort of muddied the water about what inflation rate he's actually
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  targeting.
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  He's talked about alternatives to the main.
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  indicator that the Fed has used historically for inflation.
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  And yeah, so the bond market reaction was the longer dated bond yields sold off and
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  shorter dated bond yields actually rallied slightly.
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  And that's typically a sign that the market is doubting medium term credibility
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  or thinks policy is too
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  loose.
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  So he's saying, well, you know, the markets need to work it out for
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  themselves.
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  But at the moment, the markets, I think, are worried that he's not delivering on
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  his promise to...
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  bring inflation back to target.
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  Exactly.
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  And to that point, here's what he said.
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  Not one of my FOMC colleagues is under any illusion.
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  We have begun a new chapter and we understand that the five plus years of
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  inflation above target cannot be cured
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  in nine weeks.
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  Well, I think what the market says is, well, you've had two meetings now, maybe
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  you should start immediately.
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  Well, also, it's not a short term problem.
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  Inflation has been above target for years now.
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  So I think the reason for the dissent was, you know, they're that some members feel,
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  you know, enough's enough.
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  Yes, you know, inflation might come down to target, but we need to make sure that
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  happens.
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  It was, I think, slightly confusing.
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  And I also think that he's saying, well, we're not going to tell the bond market,
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  you know, we're not going to tell markets what
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  we're going to do, we're not going to give you forward guidance, you need to follow
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  the data and work it out.
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  And then to some extent, the Fed will take signals from the market.
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  I think the problem is everyone's looking at each other trying to understand what's
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  going on.
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  The Fed are looking at the market, or at least Kevin Walsh is, the market is
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  looking at the Fed, and nobody really has clarity about what the
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  agenda is.
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  So ultimately, at the moment, my guess is they will probably feel more pressure to
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  raise rates in
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  September if the yield curve continues to steepen, because it's, as I said, it's a
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  sign that the market is beginning to doubt the sort
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  of more medium term inflation credibility.
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  And that's definitely not something the Fed wants to see.
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  You said the word doubt.
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  Market participants hate the word doubt.
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  They hate the word uncertainty.
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  So, as you say, does it undermine the credibility of the new chair, Mr Kevin
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  Walsh, or is it just him finding
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  his feet?
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  And given what you saw last night, have you altered your position or attempted to
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  alter your positioning at 91?
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  So we were pretty cautious going into it, partly because we thought it was actually
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  a toss up, whether they would hike or not.
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  But I do think we're in this sort of slightly more challenging environment,
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  where his approach is, is creating uncertainty.
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  And that's clearly something he thinks is a good thing.
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  Generally, I'm not so sure because it creates potentially a higher cost of
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  borrowing for the economy further out because
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  investors basically need a risk and there's more volatility, more uncertainty.
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  Obviously, that also potentially has an impact on the equity market.
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  So we've been fairly hunkered down of late.
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  We're concerned that we're in an environment where rates are going sideways
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  to higher rather than down.
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  So that's not very supportive generally of bond markets.
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  In addition, you know, clearly equity markets are pricing in some pretty
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  exciting future developments for AI, which may or
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  may not play out.
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  So, you know, and if bond yields start to rise further, that potentially also
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  creates problems for the...
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  equity market, not least because a lot of the hyperscalers are borrowing a lot of
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  money from the bond market, but also
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  because it makes bonds a sort of an alternative thing to hold rather than
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  uncertain equity.
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  So, you know, you've now got a I think over 3% real so inflation adjusted yield
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  on US 30 year
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  bonds.
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  And for some people, that's going to look like a more compelling bet than buying,
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  you know, Nvidia or
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  Amazon or Meta or whoever.
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  at potentially quite optimistic valuation levels.
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  John, thank you very much for your analysis.
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  John Stockford is head of multi-asset income 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, employer or company
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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
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  rethinking at any time.
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  Please do not hold us to them in perpetuity.