AFH Monday Espresso Podcast

Monday Espresso Podcast - 16th February 2026

[00:00:00] Rory Dowie: Good morning. Today's Monday, the 16th of February, and today I'm delighted to be joined by James Athey. James is one of our Bond Fund Managers here at Marlborough. Aside from that, he's also a Tottenham Hotspur fan, so I thought, what better time to bring him on the pod given the run of form they've had, which culminated them losing their manager last week so James, good morning.

[00:00:18] James Athey: Hey Rory. Thank you for having me. I will try to keep my rant about Spurs to under 10 minutes.

[00:00:25] Rory Dowie: Good stuff. We can talk about bonds instead. We had lots going on last week and we've spoken a lot about tech and AI and equities over recent weeks, so I thought in the name of diversification. Good to pivot to other things and give our listeners an update there.

[00:00:36] Rory Dowie: So today we're gonna talk about the bond market, US payrolls data, which we had, and then an update on the political situation in Japan. But firstly on the performance side of things last week. To be honest, it's been pretty similar to what we've seen this year. The US was lagging across the major equity markets and finished down about 1.5% for the week.

[00:00:54] Rory Dowie: UK and Europe were broadly flat whilst, you know, as we've seen over January and February, it was really Emerging Markets and Japan being the standout performers, they finished up 5% and 4% respectively. They're also leaving away this year, Japan's actually now up 10% and remarkably Emerging Markets are up 12% and we are only in February.

[00:01:12] Rory Dowie: So very, very strong performance across those two equity markets there. Pivoting to the news from last week, James, what can you tell us about what went on last week? Be great for our listeners to get a bit of an update on all things bond markets.

[00:01:25] James Athey: Sure thing. Yeah, I mean. There has been a lot going on in the last week.

[00:01:29] James Athey: There has been a lot going on year to date. It definitely feels like the news cycle, the data, the politics are creating incredible push and pull forces on markets in general and certainly bond markets are not immune. Actually what's gone on in equity markets this week has had a fairly significant role to play in what bond markets are doing, I think as well.

[00:01:50] James Athey: But yeah you mentioned payrolls, obviously that's always a big one. You know, when the US reports monthly on the state of the labour market, that's the probably the single most important data point generally in the calendar, but at a time like this, where the Federal Reserve has been cutting rates, its potentially looking to cut rates in the future, and has placed unemployment and the labour market squarely at the center of those decisions, of course it has heightened value.

[00:02:16] James Athey: What's interesting, from this last week is, the extent to which the bond market reaction really seemed, you know, complete opposite to what you might expect given the data. So the market was anticipating weakness, let's say in the jobs market. That's something we've seen a lot of over the last 12 months, and the market expected that to continue.

[00:02:35] James Athey: Actually, we saw a fairly large upside surprise, a quite healthy looking 130,000 jobs added for the month. So that's the headline. The under the hood interpretation, possibly a little less, positive for the economy than that. Once again, it was healthcare, which accounted for the majority, if not all, of the job creation, and that's a low productivity, low wage paying sector, and doesn't really speak to sort of cyclical or economic strength in general. I think one other thing to note is, is that potentially the season played a role in the upside surprise. You get a lot of hiring ahead of Christmas for obvious reasons, and a lot of those jobs then tend to disappear come January, so you get this seasonality.

[00:03:19] James Athey: Hiring was a bit disappointing this last December by extension therefore, those job cuts that come afterwards would've been lower than expected.

[00:03:28] Rory Dowie: Okay, so on the surface it looked like a fairly good print in the US on the job side of things, but actually lifting the hoods, you know, as you said, seasonal factors there and kind of the healthcare sector being kind of one of the main drivers of those good numbers, which, you know, as you just just alluded to, potentially isn't great.

[00:03:44] Rory Dowie: I guess in terms of, you know, we've spoken a lot about the Fed and cutting rates over the last few months and we spoke about that on the pod. How does the market take that in terms of rate cuts and the probabilities of rate cuts this year and what are expectations for rate cuts in the US for the rest of this year James?

[00:04:01] James Athey: Yeah, it's the right question. I mean, the initial reaction, unsurprisingly, was to reduce the likelihood of further rate cuts this year, not by much, probably by around 10 basis points in total at its maximum in the aftermath of that number that we saw on Wednesday last week. But that reaction from the market didn't last long.

[00:04:20] James Athey: It seems that other investors, other commentators, other observers, started to sort of draw the same interpretation that we had, that maybe that strength was somewhat overstated. It stands out in a broader trend of a slowing labour market, and therefore there's probably not a huge amount of signal value.

[00:04:38] James Athey: The market's pretty much stuck at around two cuts priced for the coming year. That's probably a reasonable base case from our perspective, we wouldn't disagree strongly with that. Our bias would be that we're more likely to see three cuts than one cut in 2026.

[00:04:55] Rory Dowie: Very, very insightful. Thank you for that.

[00:04:57] Rory Dowie: Maybe changing tax somewhat. I mentioned the Japan equity markets at the start of the pod and the strong performance we've seen this year. W e had some political news out of Japan last week. Could you give our listeners an update on the latest there?

[00:05:08] James Athey: Yeah, politics is definitely in focus in Japan of course, we had an election in Japan the prior weekend. This is where the new leader of the LDP, which is the dominant party in Japanese politics and has been for decades and decades. She was elected leader of the LDP and has subsequently really seen her support grow quite dramatically among the public.

[00:05:31] James Athey: She took the opportunity therefore, to call a snap election, try and consolidate that power. That was expected to be successful in the sense of winning seats, but the actual result really was at the top end of expectations in terms of the magnitude of that success. A huge majority in the Japanese lower house, actually a two thirds majority, which allows them to sort of bypass the veto from the upper house that gives Sanae Takaichi, who's the prime minister.

[00:05:59] James Athey: That gives her sort of huge sway, huge power, huge control. And given that she's been campaigning on a fiscal expansion the market expectation really was that that would be bad for the yen, worries about fiscal sustainability, bad for government bonds. So rising yields, falling prices, again, worries about fiscal sustainability, but good for the Japanese equity market because of course if governments are boosting domestic spending, that should boost growth.

[00:06:27] James Athey: That was the reaction initially, but it didn't last long. We've seen actually the yen strengthen government bond yields fall quite handily and that has supported that bullish reaction that you've already described in terms of equities.

[00:06:40] Rory Dowie: Very insightful. Thank you very much for that, James. Just keeping an eye on the time, what have our listeners got to look out for this week?

[00:06:47] James Athey: Yeah, so not a huge amount in the calendar coming up in the next week.

[00:06:52] James Athey: I guess the key data point certainly is in the UK where we have inflation data, and again, of course that's hugely significant for the Bank of England. Broadly speaking, markets are expecting inflation in the UK to moderate quite handily in the coming year. We would share that view. But just a note again, on the politics, we're seeing a lot of noise around the leadership of the Labour Party and of course that means, noise around the Prime Minister and the Chancellor. That noise has died down a little in the last few days, but we suspect that we're not hearing the end of that.

[00:07:21] James Athey: It might not be till after local elections in May, but I think political noise in the UK will continue and that's keeping us a bit more cautious on the guilt market.

[00:07:29] Rory Dowie: Thank you very much, James. Listeners. I hope you found that useful. As always, if you have any questions, we're here. Until next time wishing you all a great week ahead.