Hello and thanks very much for joining the latest of these webinars that we've been running on a monthly basis. It's Mark Dowding here, CIO, within the BlueBay Investment team in RBC Global Asset Management so great to be back on again, and a timely sort of moment to be having one of these calls. Actually, last week I was in Washington, DC doing a bit of a research trip meeting with policymakers that took me around the city in terms of the different Government departments, and also within the White House. And so certainly interesting to share some reflections on the back of that trip.

But anyway, I think the part of the narrative was having sort of visited last week to DC. Obviously, there's this narrative that since markets took a tumble at the start of April, there has been a building narrative that maybe we're past the worst of the volatility and actually is Trump, is the administration actually being sort of constrained by what markets did at that time? Are we pivoting to a more pragmatic, more sensible landing spot around things like trade and tariffs?

Now, I guess to this particular question, having spent time in DC last week, my clear observation is that on the back of meetings the answer is I think that a sort of more optimistic narrative is now likely to be challenged. If anything, I come back from my visit more concerned than I was when I went, and meetings with policymakers really sort of suggested to me that there's really quite a material gap between how the administration is looking at things, and what their agenda is going to be compared to how the market might want to be looking at things in the here and now.

Now I'll come to more specifics in a moment, but I think the first thing to say in terms of the US economy is that for the time being the economy continues to operate ok. You'll have seen the payrolls data last week, adding another 177k jobs in the month of April. Everything is continuing to do relatively ok. You can ignore the Q1 GDP figures that as covered on prior calls was a bit of a statistical outlier because of what was happening to imports in Q1 ahead of Liberation Day. But the underlying demand in the economy has been relatively healthy, and what we are hearing from us businesses is a sense in the near term that if anything CEOs, business leaders are trying to calm down their customers, they're trying to tell them that they're not passing on any higher prices as a result of tariffs in the near term.

What they're going to do for the time being is they're just going to draw down their inventories, keep going, and then hope by the time their inventories are depleted we've actually pivoted and ended up with a more advantageous tariff landing spot.

So for the time being, economic data have looked okay, I think, can continue to look ok for the coming few weeks. However, the problem here is that the way the Administration is looking at this is they've announced their tariffs, arguably they've done more than many would have thought if you go back six weeks, eight weeks ago, what we've seen on tariffs has clearly been more assertive than one would have imagined.

Yet actually, the economy is doing okay in terms of the data and to boot the stock market has actually gone up last month, not got down. So if anything, the administration is telling itself there's nothing to worry too much about in terms of the tariff agenda here, and so if anything, there's a desire to continue to up the ante, be on the front foot.

Indeed, over the course of the weekend we've seen this news that Donald Trump is looking at extending tariffs on the US movie industry, sort of tariffing non-US movies. And I think one of the interesting things to highlight here is, as far as I understand, this is one of the first times we've seen this whole idea of a tariff war being extended into the service sector, not just into traded goods.

How this gets implemented, whether it sees the light of day, who knows, really. But if anything, I do think that direction of travel is in that more assertive direction.

What you'll also hear is in the context of the US, a lot of business is howling with protest that how can they plan? How can they invest? How can they do anything given how much uncertainty persists for the time being?

This uncertainty is obviously a bad thing for anyone trying to engage in economic planning, yet at the same time you speak with the administration, they say the degree of the current uncertainty in policy is entirely intentional. They want to keep up uncertainty to keep everyone second guessing in terms of trade negotiations. And I was even sort of given a quote along the lines of “It's always good to try and negotiate with your adversaries while you're standing on their throats”. And this sort of hawkish narrative that effectively is being utilized, I think, is something which is something that strikes me with a degree of concern, certainly doesn't suggest to me that things are projecting in a more rational pragmatic narrative any time soon.

I'd also observe that it had long been my thought or my hope, anyway, that eventually tariffs that were being sort of expedited by executive order would eventually be replaced by tariffs that are pushed through as an act of Congress. Now I always thought that tariffs would need to go through Congress because the way things have stood in order to use the tariff revenue in your budget, you can only do so if that sort of revenue is part of a legislated package. Well, that's the way we've worked up until now.

But what I've been hearing from Congress is very much a sense that no one in Congress wants to touch tariffs whatsoever. In fact, they'd much rather change the rules over how tariff revenue is used rather than actually trying to implement it themselves. And so from that point of view it gives Trump more the ability to actually come up with a placeholder for tariff revenue that gets thrown into the budget negotiations.

And therein I think that you continue to see how tariff revenue is something that is going to be important. The Administration isn't doing this tariff move just for effect. It does want to see the benefits of revenue coming through on the back of its actions. And that being the case as well, I don't think that you're going to end up with a move to a materially lower rate than we currently have here and now today.

So I do think that the path ahead could see more economic dislocation. There could be more of a cliff-edge event if we suddenly end up running to the point where effectively you end up with no ships going to the US. Across the Pacific trade effectively stops the ports, end up empty., the truckers have got no units to drive anywhere.

There could be more of an abrupt stop which ends up having a big impact on supply chains in a month or two from now on the one hand. And on the other hand, I think that this sort of narrative, coming from the Administration, continues to highlight the fact that they're really determined to effectively effect change, end up ending, greatly limiting anyway, the US economic dependency on China.

Time and again they cite how China is responsible for 30% of manufacturing. The 70% that they don't manufacture, often time they are responsible for manufacturing, producing or refining the materials, the inputs that go into the other 70%.

So this over reliance on China has got to end, it's got to change. And the hawkish narrative that certainly I'm hearing is something that is giving pause for concern. So from that perspective, I think that that could be a bit troubling for risk assets ahead. Indeed, you could also sort of build a bit of a narrative here that it was when the S&P went below 5,000, that economic sense seemed to come back into some of the rhetoric and some of the narrative. With the S&P back above 5500, you end up with the economic narrative ending up diverging in a different direction again.

So maybe, in a way, you actually need to see more of a market reaction in order to cause the administration to actually take a somewhat more conciliatory stance. So this is something that is troubling.

I think the other thing I would also highlight is a lot of discussions around the US debt and problems around the deficit effectively. If you look at where the deficit currently stands, you are looking at a deficit of around 6.5% of GDP. Historically, when you've gone into a recession, you can add another 4 points of GDP onto that. Were that to occur, obviously double-digit deficits in the US, this would be the sort of fiscal sort of problems that you were having in the European periphery sort of back at the start of the last decade, for example. So that elevated level of deficits, I think, is a real cause of concern. There's no real plan for how to bring that down, absent a big decline in interest rates.

People ask around the impact of the DOGE and Musk, who's obviously now moved on. It looks like you'll have the elimination of about 120 to 200,000 jobs. But oftentimes a lot of those jobs that have been eliminated, a big chunk of those for example in the IRS, the tax revenue collection agency. And in as much as you've got rid of jobs there, it's going to lead to far fewer tax audits and actually less focus on tax collection. You could end up seeing a big reduction in tax receipts. And so cutting money from the IRS isn't actually going to end up with you, ending up with a better deficit position. You could end up with a worse deficit position into the bargain.

So from that point of view, what's happening on DOGE seems to be relatively superficial and otherwise when it comes to the US debt, I think sort of growing concerns in a number of circles. And you then pull this back towards the position of the Fed, and the Fed, of course, are caught in a difficult position.

We've got a meeting from the FOMC this week. which is why I didn't see any of the current Fed team in my visit to DC last week. I saw a number of the Ex-Fed officials, and I think that from those that we speak to there, there's a unanimous sense that monetary policy will most probably go nowhere over the course of the months ahead. I know that markets have wanted to discount Fed cuts, but I don't really see any sign that the Fed is going to be cutting rates anytime soon.

Of course, if you ended up with a really big drop in financial markets that brought about a tightening of financial conditions. This would give the Fed a pretext to do so. Of course, if you saw a big jump in the unemployment rate, taking unemployment rates up towards 5% very quickly. Again, there would be a pretext for the Fed to act. But bear in mind, the latest data showed unemployment unchanged at 4.2.

With everything suggesting that inflation is going up and the economy is still at full employment, I really don't see there being much of a discussion at all about cutting interest rates for the next several months. But if there is a need to ultimately cut interest rates, it could well be that you end up needing to cut 50 basis points at a time. And there's a sudden decline of more than 100 basis points or 200 basis points.

So when you look at all of these scenarios together, it's why in a way the fair value for the curve will always be to have the forward looking cash rate below the current cash rate, because in your different scenarios it's far easier to build scenarios where the Fed do end up needing to cut rather than a situation where the Fed will end up hiking.

So from that point of view, cash rates today at 4.30. We've thought that the two year is around fair value at 4%, so it currently looks a bit rich to us. We think fair value on tens is around 4 and a half. Again we think yields today are a little bit rich, but we'd only really be looking to be short duration on 10-year yields below 4.2. Similarly, we'd be more inclined to be short of the 30-year part of the curve. But here we think that we probably want to be short around a 4.65 sort of level, not at 4.85, where we are today. Over time the yield curve should steepen, we should end up with more of a term premium.

The one thing that I'd say with curve steepening trades, though, is for them to really work. You really need to see the front end of the curve going down. It can't just be about the back end of the curve going up so for the time being. I'm not sure that there's a really compelling US rates trade to be done. If there is a more concrete takeaway from the US visit, it's more with the view to being cautious around risk assets where we've been adding exposure to risk assets.

Early April following markets having a drawdown by taking off CDS hedges we now see ourselves looking to add back to those hedges and drive in a more cautious direction.

Otherwise turning across to matters elsewhere, we've of course in the past week seen a new Prime Minister in Canada in Mark Carney, congrats to him. We'll see how things go. I know that he's going down to DC shortly, if not today, if I might be mistaken. But I think that, given the Liberals there have taken a position that they want to push back hard against Trump, I think that again this could be sort of problematic for Canada itself. And if you do end up seeing the US economy slowing as we think is going to be likely, almost inevitable. clearly Canada will be hurt on the back of some of this. So I think that Canada remains somewhat challenged from a macro perspective.

In Europe by contrast, I think that the direction of travel is still towards more fiscal ease. I was hoping to say that Merz would be a Chancellor, but he didn't get his first try earlier. Today, hopefully by the end of today, we may see Merz in Germany, installed as Chancellor. But I do think that under Merz we are going to see more delivery, more of a fiscal push, more of a fiscal push coming across Europe. That may be something that actually helps hold up the data in the eurozone for the time being. So maybe look for a few better numbers there.

Otherwise moving to the UK, I still continue to be concerned about the UK backdrop, both in terms of growth and inflation. The Bank of England will cut rates this week. They've been dying to cut rates for ages, but ultimately I think this will be a one and done here. Inflation is going to be materially worse when we see it later this month. I do think the inflation expectations have de-anchored in the UK and the UK is battling with a degree of stagflation.

And it's really in a position where it's difficult for policy to do much about this. There's no real room on the monetary side. And it's interesting that even as the Bank of England looks to cut rates, longer dated yields have been sort of pushing a bit higher. So it's not really having any real benefit.

In the same way, it's hard to do anything on fiscal policy. We don't really have the fiscal space. I don't think the Government can afford to water down the fiscal framework. They may fiddle at the edges, but it's just fiddling.

On the back of last week's local Council elections, with Reform doing very well, you're hearing Labour saying we need to move in a direction where we are being punished because we scrapped winter fuel payments. Let's reinstate some of those, or let's do some other things. But the reality is that you'll get to a budget later in the year, there will be no more money to spend. You will need to do more tax hikes as well as spending cuts.

What the UK needs more than anything else is growth and Starmer and colleagues need to realise that just saying you want to be growth orientated doesn't actually make growth occur. You actually need to demonstrate. you're going to do something about it. What are you actually going to do to actually get the country back to work in a more dynamic fashion? Because at the moment the government just seems to be a government of hot air is how I would see things.

Otherwise further afield other interesting things to talk about. We've had a bit of volatility in Romania following an election last weekend. We expect some more volatility ahead, notwithstanding the longer-term credit story, we think, remains very much intact with the Romania as a country which is very strategically important in the context of its geopolitical position within the EU.

Elsewhere we saw a big move stronger in the Taiwan dollar over the last couple of days,some repatriation flows, some pressure. There may be some talk here about how FX forms part of what gets struck in terms of any trade deals that get announced, and indeed, to that extent we continue to highlight the yen as a currency that we continue to like.

Otherwise in Japan the BOJ was a bit dovish, but I think that was a temporary aberration. We have seen 10-year yields go down. I now think that you're moving into a zone where we'd be looking for those to move back higher again but continue to highlight value at the 30 end of the curve. Over the course of the past month, we've seen a number of dislocations, number of assets get out of line, and it is creating investment opportunities. But in some of these volatile markets some of this isn't for the faint hearted. It's more of a challenging macro backdrop in a number of ways.

But I think navigating through this with a sense of where we go next, is where we want to be positioning ourselves, and to that end, I think again I was going to leave some time for some questions.

I think the sort of principal takeaway here is that when it comes to the US picture have we seen the worst markets already in the course of April 2025? Well actually I think there'll probably be another dip between now and the end of the year, likely between now and the next couple of months, where you can see those lows of April tested once more.

But with that I'll leave my comments there, and I'm going to move across to see if we have any questions online. And I'm pleased to say we've got sort of 3 on Slido already, I think. In fact, the first one of the questions actually speaks to what's happening in Romania.

We had a first round of election over the course of the past weekend. The candidate who ended up winning, Simion, in the first round is probably likely to win the second round, too, and he's been more of an anti-establishment candidate that has led to a collapse of the ruling coalition in the country.

But here one of the things we'd say about Simion is that we might look at him through a similar lens as more of a right-wing, leaning politician of a more populist hue, as someone who's a bit similar to Giorgia Meloni. And in the same way markets feared Giorgia Meloni. But actually that's ended up going okay. We think that ultimately, even if we end up with Simion, we'll end up with a coalition, and we'll end up with assets doing okay there, albeit some short-term volatility.

Second question is given the current policy outlook in the US, what could trigger a Liz Truss mini budget crisis like moment?

So here in the US I think a couple of things to say is, I think we are very unlikely to see China or any big overseas investors dumping treasuries. But I do certainly think we will end up seeing them buying fewer treasuries going forward.

That being the case, that is something that can add a bit of pressure to the US curve.We could see a rating downgrade, but I don't think that's very likely. I don't think it would be very significant, and certainly, if I was a ratings firm, I'd be fearing being sanctioned by Donald Trump if I were to do this at the moment, so maybe I'd be thinking twice about my actions.

But I don't think a rating catalyst is where you have the issue. I think the greater problem could actually come through a refunding announcement. But to that end most of the debt supply is being moved shorter and shorter in duration. So you're ending up rolling over more bills, more short-term securities. And from that perspective, I think where you could have more of a moment of concern occur is if you end up with an economic slowdown.

And if you do end up with leading to a big reduction in tax receipts at a time when entitlements are going up and you do end up tipping towards a double digit deficit, I think that this could be the moment that actually caused a real focus back on the US debt sustainability situation. That could be the moment that I think could be the thing that is most concerning in terms of the US, because the other thing to say about debt, sustainability is when the economy is growing, then actually you've got a high numerator. But a high denominator, it’s when the denominator in the equation is actually going into reverse that you've got actually more of a problem.

Is there a chance that fiscal stimulus in Germany ends up disappointing?

Well, yeah, there's a chance. But if anything, we're more inclined to think that it's likely to be bigger than many people are currently expecting or anticipating. So the question is, how quickly does money get spent? How quickly does it get deployed?

But the one thing that I would say is that the Trump shock, in a way within the European establishment is really driving policy makers to be more determined to deploy more quickly, more assertively than ever would have been the case. Sometimes in the past I used to talk about Europe as having the problem being like the boiling frog. You know the frog that sits in the pan and then slowly cooks itself as opposed to the frog that jumps out of the boiling hot water.

Well, in a way, I guess if the boiling frog was the problem in the past, there is an argument that Trump is the necessary shock therapy that's poured in the boiling water that's got Germany leaping out. It's got things moving. So from that perspective. I would be personally a bit more hopeful. But we'll be having to look at delivery in terms of the days ahead.

Otherwise why do we think that we will see bad inflation in the UK?

Well, bluntly, the price of everything's going to go up. If you look at the tax rises at the start of the month, you've ended up with businesses having to pay higher minimum wage. You've had the additional tax in terms of the NI tax moves. All of those additional costs have hurt businesses. I see businesses passing those cost rises on. You've seen utility bills jump again. Those costs end up being passed on. I think that we're calling “billmageddon”, was the phrase that is sometimes used every time these things come around. And so from that perspective is where I think prices are moving higher.

If you look at what's happening on wage growth as well, you see that UK wages are still growing, even though there is no productivity in the economy. And herein, I think again, that's inconsistent with inflation coming down. That's more suggestive that inflation is going up. So I think UK inflation is around 4%, stays stuck around 4% against that backdrop. I don't really think the Bank of England should be lowering rates.

Any views about the German political news of today?

Well, here the news was that in the first round of voting Merz didn't get confirmed as Chancellor, there's going to be another round of voting, I think a bit later this afternoon. We think he gets it. Then if he doesn't get it today, we think tomorrow. It could take up to a week, or maybe two, but ultimately you won't need a full majority. He will get the position as Chancellor, but I think we just see the SPD being maybe a bit more assertive than they have been in the past.

And lastly, what is the view on European inflation and yield curve shape on a 12 month basis? Any thought on euro high yield spreads?

So here I think the thought on European inflation is that whereas US inflation is clearly going higher there are reasons to think that, depending whether the EU does counter tariffs on the US, which would put domestic inflation up if they do, that inflation in the eurozone will go a bit higher. But if they don't end up with counter tariffs, you could actually end up with inflation, going lower, particularly if China ends up dumping goods in Europe.

But then I think that Europe wants to avoid that outcome as well. That will only hurt domestic industry. So I think my sort of best guess would be inflation in the context of the eurozone stays around sort of 2% ish, don't have a clear view, unlike the US where inflation is clearly going the wrong way, in the UK where inflation is also going in the wrong way.

And lastly on European high yield I think from a high yield perspective the question you're asking yourself is around defaults. And are you going to see a big default cycle? Well in the US I do think you're going to see growth under pressure. You could well end up in recession. I think that a recession in Europe is much less likely largely because you are easing fiscal policy, where you don't have room to ease fiscal policy in the US.

That's one of the things which I think continues to keep European growth around 1%, and if the economy is still growing, I don't think you see a big move up in defaults, albeit you may have impacts in particular sectors. And some of those impacts could actually feed into what's happening around trade policy and tariffs as well. That being the case, I think that credit hangs in ok, much better than equities.

I think European assets do much better than US assets. That said we do know that in the short term, if spreads go wider in the US market, they'll be pulled wider in the European market, and it's for that reason, on a short-term basis, that having sort of added directional credit risk exposure at the start of April, we're now sort of putting up the flag raising a note that we now want to pivot back towards a more cautious stance.

With that I'm going to close off my comments for today. Thank you very much for joining this particular podcast. Hope you're doing well in these markets and catch many of you this time next month. Thank you.