Logic Monday Espresso Podcast

Monday Espresso Podcast - 26th May 2025

[00:00:00] Nathan Sweeney: It is Monday, the 26th of May. Maybe a bank holiday for some, but not for us here at the Espresso Podcast, obviously looking to give you those updates when you need them. Really pleased to be joined by Niall McDermott today. So Niall is a bond fund manager here at Marlborough and he's really dialed into what's happening in bond markets.

[00:00:19] ] Nathan Sweeney: So I thought it'd be great to get him on the show because we had a lot happening in bond markets last week. So I'd be looking forward to his insight. Morning Niall, great to have you on the show.

[00:00:27] Niall McDermott: Good morning, Nathan. Great to be here.

[00:00:29] Nathan Sweeney: So I'll start off with a quick recap of what was happening in markets last week before we move over to Niall, to get a bit of a understanding of what was happening in bond land specifically.

[00:00:39] ] Nathan Sweeney: But if we look at equity markets, we had a good week for UK equities that were up close to 1% as well as Hong Kong. Europe was broadly flat US get back a little, but that was due to some of the things we're gonna talk about now in a second. But fundamentally, you know, a lot of the focus last week was on bond markets.

[00:00:58] ] Nathan Sweeney: So what I'll do is I'll just hand over to Niall to give us a quick recap of what was happening in markets last week.

[00:01:06] Niall McDermott: Yeah, absolutely. So we had some economic data. We had PMI data for the US that's survey data from purchasing managers. It was a bit better than markets had expected, so that was positive.

[00:01:23] Niall McDermott: And we had some UK CPI data, so that's consumer price index data, and that's measuring inflation. That was actually a bit higher than markets had anticipated, but that said, that doesn't really change much though because it's affected by the time of year where in April we had energy price resets. And also we had the big tariff announcements through April that were off and on, causing quite a bit of distortion. So markets mostly looked through that.

[00:01:59] Nathan Sweeney: Yeah, so just on PMI. So if you're, you know, a manager in a factory, you purchase stuff. You fill out a survey and it just asks you about things like pricing. You're paying more, you're paying less, and they use that as a survey to gauge what's happening in the manufacturing sector.

[00:02:12] Nathan Sweeney: They call a PMI Purchasing Manager index, and then on the inflation front. Yeah the other thing I was thinking is, look, we've had great weather in the UK. Of course the last, you know, two months. So for me, I think, you know, a lot of people as well just going out and buying that extra pair of shorts again, which is pushing up that inflation.

[00:02:30] Nathan Sweeney: But you're right, a lot of that linked to energy, price caps too. But you know, the big news was on bond market side. So what was happening there?

[00:02:38] Niall McDermott: Absolutely. Yeah.

[00:02:39] Niall McDermott: So bond markets, they've been having quite a tough time. There's been this flurry of headlines since the April 2nd US Liberation day where the speed and scale of tariffs really did quite shock markets.

[00:02:56] Niall McDermott: Bond investors have been quite jittery. There's been potentially inflationary impacts from these tariffs, and the big word really is uncertainty. So no one's really knowing what Trump's gonna say and do next. No one's really knowing exactly the impacts that sort of tariffs and policy will have going forward.

[00:03:20] Niall McDermott: We also saw Moody's, which is one of the big three credit rating agencies. They downgraded their US credit rating, but actually, whilst that sounds like it's scary and a big shock. It's worth noting it's very backward looking. It's actually the last one of those big three credit rating agencies to move.

[00:03:46] Niall McDermott: The other two have already downgraded the US credit rating and it's been pretty much known that they're looking to do this for over a year.

[00:03:57] Nathan Sweeney: So that wasn't probably the real driver of what was happening in bond markets. I think it was more to do with this spending package that's been announced by the US.

[00:04:06] Niall McDermott: Absolutely. Yeah.

[00:04:07] Niall McDermott: So markets pretty much were able to ignore that Moody's downgrade. What it did do though is shine a bit of a spotlight on the US fiscal situation. So that's US government spending and taxation. So investors have been, I guess, a bit spooked in bond markets about the scale of Government borrowing and investors have been looking at alternatives to the US and we had this President Trump's one big, beautiful tax and spending bill pass the US house.

[00:04:47] Niall McDermott: So it's moving to the Senate and what that is doing it's increasing the amount that the US can borrow, is known as the debt ceiling. And it's simultaneously reducing taxes and paving the way for increased spending, so there's gonna be more debt going through. And because of that uncertainty, because of potential inflationary shocks, investors have been reducing their expectation for rate cuts, and that's been sending bond yields higher.

[00:05:20] Nathan Sweeney: Okay, so we don't fundamentally think this is a problem with the US' credit score, if you will. This is more of a look, they've got this big spending bill to get through. We're now past that. The market knows what it looks like and bond market's just repricing that in, so nothing more sinister than that.

[00:05:38] Niall McDermott: Absolutely. It's lots of headlines at the minute. We've just actually the end of last week had another headline for markets, so that's President Trump announcing that there's gonna be a 50% tariff on the EU starting on the 1st of June. So that's actually caused bond yields to fall. Bond prices have have gone up in the back of that, and that is partially due to the anticipated sort of hit to economic growth that's expected to have.

[00:06:10] Niall McDermott: But that said, you know, it's still early days, whether that's then rolled back or positioning for some deal is too early to really say.

[00:06:19] Nathan Sweeney: Yeah, it sounds like classic Trump 101 art of the deal tactics here, shout the big number and get to a more sensible number. So, you know, forcing the Europeans to the trade negotiation table.

[00:06:31] Nathan Sweeney: Alright, that's some great insight there. And you know, conscious that, you know, within the bond space there is a lot of complex terminology. We do have a glossary of terms on our website, so if there's anything you heard that you were unsure of, please head over and take a look. It'll provide more insight.

[00:06:45] Nathan Sweeney: Or additionally, just email us, ask us the question. We'd be more than happy to answer it. So looking at this week, what do we have coming up? The big thing is Nvidia. So Nvidia is one of the biggest companies in the world. They're releasing their earnings. They're at the forefront of AI making these chips that are used in artificial intelligence.

[00:07:02] Nathan Sweeney: And people will want to know, are company's still demanding these chips? Are we still building out this new technology? So a lot of people will be focused on that, and there's not a lot of other big market moving data coming out. We've got a thing called the FOMC minutes, so this is the minutes from the central bank meeting in the US and people will look at that to see what are those guys thinking.

[00:07:24] Nathan Sweeney: Are they thinking of cutting rates? What are they thinking about? Inflation and tars. So people will always look at that as well. So we'll be keeping a close eye on that too.

[00:07:33] Nathan Sweeney: Thanks for listening. Hope you have a great week, and yeah, hope you enjoyed the podcast.