24/03/25: Central bank moves, tariff uncertainty & market expectations

Monday Espresso Podcast - 24 March 2025

[00:00:05] Nathan Sweeney: It is Monday, the 24th of March. Today I'm joined by James Athey, bond fund manager here at Marlborough. Good morning, James.

[00:00:12] James Athey: Hi, Nathan. Thank you for having me back.

[00:00:15] Nathan Sweeney: Yeah, it's great to have you back on the show. It's been a couple of weeks now, but clearly a lot happening in markets between then and now. So I'll just start with a quick recap of you know how markets performed last week.

[00:00:25] Nathan Sweeney: You know, broadly equities were flat. We saw the US was marginally down for the week NASDAQ off a little bit more for the week. And really you have investors are still kind of weighing up what's happening with tariffs. Will they lead to potential inflation? And what does that mean for central banks?

[00:00:42] Nathan Sweeney: And the T word is back on the agenda. So that T word is transitory. So if everybody remembers when inflation started to kick back up two years ago, central banks were saying it's transitory and it turned out not to be. And now they're saying that actually any inflation linked to tariffs could be transitory.

[00:01:01] Nathan Sweeney: We'll just have to wait and see whether that's the case or not. But James, let's bring you in and just get some insight into actually what were markets focused on last week.

[00:01:09] James Athey: Yeah, sure thing, Nathan. Yeah, the T word is not the only dirty word that's come back into the markets lexicon in the last week.

[00:01:15] James Athey: Definitely the S word, another not good one, which is stagflation, seems to be increasingly on people's lips, and I'm sure that relates to tariff policy, as you've just described. Nobody really knows, A, if there are even going to be tariffs, B, how big they'll be, how widespread they'll be, and C, I guess most importantly, even if we get there, it's very difficult to actually assess truly what that would mean for consumer prices.

[00:01:41] James Athey: And, of course, for central banks. What should central banks do in response to what potentially could be a anti growth pro inflation shock? That's a very difficult thing for them to deal with. So we had three instances of central banks trying to make sense of this stuff this week. The Bank of Japan, unsurprisingly, didn't hike rates, really didn't give us any new information.

[00:02:06] James Athey: That was widely expected, and they weren't priced to change rate policy. The Federal Reserve, likewise. Did not change interest rates. Again, that's what markets were expecting. Chair Powell tried to think, give a little more detail on their thinking. But ultimately, it really is still a case of wait and see.

[00:02:27] James Athey: The Fed doesn't want to be political. It's trying not to make the sort of analysis error that you described with respect to transitory inflation previously. So for now, they remain in wait and see mode. And then much closer to home, the good old Bank of England. The bane of every bond manager's existence.

[00:02:47] James Athey: Trying to make sense of the Bank of England's policy from one month to the next is very difficult. Again, they didn't change rate policy this last week. They weren't expected to. The vote to not cut rates was 8-1, and that was a bit of a surprise to markets. Catherine Mann, who has been voting for hikes of 50 basis points up until very recently, then suddenly switched to voting for a cut of 50 basis points at the last meeting.

[00:03:17] James Athey: And then this meeting, she switched back to voting for no change. Really hard to rationalise that sort of switching of views in such a short space of time. But again, ultimately the message I think from the bank is they are expecting to be on a path of easing policy, but they're not going to rush, it's going to be slow and steady.

[00:03:35] James Athey: They want to see more data. Just quickly on the subject of data, we did see some labour market data in the UK. Again, it's a bit of a mixed bag, but if you look at the claimant count, so people who are actually claiming for unemployment payments, that ticked up, and that I think is the most reliable data we have on the labour market.

[00:03:53] James Athey: So, that's not a great piece of information from an economic perspective, but from the bank's perspective trying to get inflation down, that's somewhat welcome news for them.

[00:04:03] Nathan Sweeney: Yeah. So, you know, the key there is that the central banks are really considering what tariffs might mean for inflation. And that's just causing them to kind of pause for thought on whether or not, you know, they should cut or whether they should hold off on cutting just in case inflation reasserts itself.

[00:04:20] Nathan Sweeney: But we're not really seeing any sign of inflation to date coming through from some of the tariffs that have been imposed, specifically China, really. Today, so there's no real sign there, and I suppose one thing that is happening is it's just creating uncertainty for investors, and also for consumers as well, and they're holding back on spending because of the uncertain environment and that really is good news for central banks, because as you point out, it brings that inflation down.

[00:04:48] Nathan Sweeney: And you know, so that just paves the way for central banks to be able to cut those rates. So even though, you know, we're not seeing those rate cuts coming through just yet. It doesn't mean that they won't come through.

[00:04:58] Nathan Sweeney: So, you know, inflation is the thing to watch, but there's no real concern there at this point in time. Was there anything else of note during the week that we should highlight?

[00:05:06] James Athey: No. I mean, obviously in this current environment where you seem to have economic policy being made by social media in the middle of the night, there's almost not a day goes by where there doesn't seem to be something that's getting markets hot under the collar, but you know.

[00:05:20] James Athey: You and I, we're investors and we're trying to look through the noise and seek the signal. And so in terms of significant things that you can really get your hands around and, you know treat as being real, if you like, in terms of the investment outlook.

[00:05:35] James Athey: There hasn't been a huge amount beyond what we've discussed that's gone on this last week. There has definitely been a deterioration in sentiment. And to your point, exactly a lot of that I think relates to just how uncertain businesses, consumers, policy makers, and investors are all feeling. And that is just starting to weigh on particularly, I think, US and US assets and the US economy.

[00:05:58] Nathan Sweeney: Okay. And then I suppose that's all looking in the rear view mirror, but what about going forward? Is there any kind of key? Data points that we should be looking out for.

[00:06:06] James Athey: We get some more consumer data in the US and again if what we're thinking about at the moment is how expectations are going to change behaviour then these are the sorts of data points that can be a little more forward looking because to your point a lot of the data we look at is really only telling us something about what happened yesterday, the day before, last month, et cetera.

[00:06:25] James Athey: So the greatest extent possible as investors, we need to be trying to think about where we're going, not where we've been. So yeah, the conference board consumer confidence data in the UK, we have some PMI surveys as well.

[00:06:38] James Athey: That's in the US we've got inflation data in the UK. And to your point, that really is ultimately the be all and end all for central banks in many ways. So that will be a big one.

[00:06:48] Nathan Sweeney: Yeah. Okay. Perfect James. Some great insight there for the audience. And as we always say, and we do mean it, if you do have questions that you'd like us to bring up on the show, please do send them in because we'd love to talk about them.

[00:06:59] Nathan Sweeney: Have a great week, everybody. And thank you for listening in.

24/03/25: Central bank moves, tariff uncertainty & market expectations

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