Logic Monday Espresso Podcast

Monday Espresso Podcast - 20th January 2025

[00:00:00] Nathan Sweeney: It is Monday, the 20th of January today. I'm joined by James Athey Marlborough Bond Fund manager. So just got James on the call again this week, because it was a lot of data out in the UK this week. So we just wanted to run through some of that just to see actually did that have any impact on the big sell off we've had in bonds over the course of the last 2 weeks.

[00:00:25] Nathan Sweeney: So James, let's just start with how did markets perform over the course of the last week?

[00:00:30] James Athey: Sure thing, Nathan. Yeah, good to be back. And thanks for having me back. I think it was definitely a week of relief. So obviously when we spoke last week, there was a fair amount of stress and concern largely emanating from the bond market, but also that was starting to leak into performance of risk facing assets like equities.

[00:00:49] James Athey: Definitely this last week has seen a reversal of that. We've seen some relief in bond yields, because again, of some of that economic data you referred to a few other factors as well. And that's allowed equities to have a much better time, both on this side of the pond and over in the US.

[00:01:07] Nathan Sweeney: Okay, so definitely good news for investors.

[00:01:09] Nathan Sweeney: And if I look at some of the big data points clearly the big one was inflation data. So we had UK inflation data. So what was the impact of the release of those figures?

[00:01:20] James Athey: Yeah, I mean, this is something that we on the bond desk have been a little out of step with the market, I guess, in recent times, we've assessed that there is ongoing progress in the disinflation in the UK, in the US to a lesser degree, but certainly in the UK, we think it's evident if you scratch beneath the surface the market has obviously been a bit more concerned.

[00:01:41] James Athey: There was definite relief across the board from the data released this last week. So headline inflation a little lower than expected at two and a half percent. Core inflation a bit more significantly below expectations at 3.2%. That was 3.5% in November.

[00:02:00] James Athey: But then really I think the bit that we really focus on is services. This is the inflation which is domestically generated that's most sensitive to the labour market, most sensitive to wages, and indeed the bit that the Bank of England has most control or most influence over. And there the news was much better.

[00:02:19] James Athey: Previously that had been running at 5% year over year. The market had expected a slight decline. We actually saw a more significant fall to 4.4%. All of that has just allowed some relief about the extent to which bond yields will continue marching higher. And of course, expectations for easing from the Bank of England have increased a little as a result.

[00:02:43] Nathan Sweeney: Yeah. So really good news there. And it obviously feeds into, what you were thinking from inflation that, you know, would come in, in lower. So we're definitely a good call on that side. I think one of the other big data points we had at was, UK growth So how does that play into people's thoughts on the bond market?

[00:03:01] James Athey: Yeah, I mean, we have these monthly GDP numbers which are reported now. That's a relatively recent phenomenon. It's a little less reliable than the quarterly data that we're used to. But of course, there's still a signal again on the softer side. Month over month, the market had expected the economy to grow by 0.2%. It was actually only 0.1%.

[00:03:23] James Athey: Again, this all feeds into the narrative, which has formed the core part of our outlook. We are at the end of a cycle. Economic activity is facing numerous headwinds. We expect it to slow over time. We expect the labour market to soften.

[00:03:39] James Athey: All of which will feed into lower inflation pressures and more rate cuts, ultimately, from central banks.

[00:03:45] Nathan Sweeney: Yeah, the last data point we had out was retail sales in the UK. So again, just I think confirmation of what you've been saying there. So some weakness there as well. I did see earlier in the week that Kier Starmer is pledging to position Britain as a top performing partner for artificial intelligence.

[00:04:02] Nathan Sweeney: So do we have any idea of how they'll look to further growth through that measure?

[00:04:07] James Athey: Not really. Unfortunately, some of these more aspirational announcements from the current government have been just that. They've been aspirational in nature. They've been lacking in detail. Some of the numbers that were being bandied around in relation to that AI announcement from the prime minister were very small, very economically insignificant.

[00:04:28] James Athey: So I think just, you know, in keeping with the, the notion of investing for a better economy that Rachel Reeves was espousing last year for now, it's a case of show me, the market is still skeptical because there is so little detail.

[00:04:44] Nathan Sweeney: Yeah. Okay. And I think the other final big piece of news this week was obviously Bank of China has injected liquidity into the market.

[00:04:51] Nathan Sweeney: And so just looking to ensure there's adequate liquidity over the Lunar New Year. And so, yeah, good news to say there's more stimulus coming out of China because, clearly, we've had a much better performing market over the course of last year. And we do expect that to continue into this year. So James, yeah, thank you for all the insight.

[00:05:08] Nathan Sweeney: So some really great detail. For the week ahead, what should people be focused on?

[00:05:12] James Athey: Much as we'd probably like to focus elsewhere, I suspect that all the attention will be on the other side of the pond. President Trump will be inaugurated. And of course, there are expectations that he will get to work very quickly, implementing some of his policies, which don't require Congress approval.

[00:05:33] James Athey: Tariffs definitely at the top of that list. And of course, the way that President Trump communicated with investors with the world at large last year was very much conversational, spur of the moment, lots of social media engagement, and we expect that to continue. So I think watch out for announcements, watch out for tape bombs, risks to the \US dollar, the US treasury yields as investors try and assess, you know, the likely impacts of some of those early announcements.

[00:06:03] Nathan Sweeney: Yeah. The other big thing is obviously we've got earnings from companies. Now, clearly we've had a really strong market for the last two years. And the focus we believe going forward is going to be on company earnings.

[00:06:13] Nathan Sweeney: But the good news is we do expect earnings to continue to be good, supported by lower inflation, falling rates, deregulation, tax cuts, and for all of those elements to trump tariffs. So yeah, we'll be watching that space closely over the course of the next couple of weeks. James, really appreciate you coming on the call today.

[00:06:31] Nathan Sweeney: Some great insight there. Thank you to our listeners and have a great week, everybody.