Hello there, and thanks for joining today's call, as we've been doing in this monthly series of market updates. Apologies for running, actually, a few seconds late today. I was on another call with another policymaker, and time was rather getting away from me, so sorry to keep you waiting for a moment or two there. But obviously, in terms of the call today, as I have done in prior months. I plan to speak for around 25 minutes, give some thoughts and perspectives in terms of how we're looking at global markets in these volatile and uncertain times. But then leave for, sort of 5 minutes or so at the end, for questions.

Okay, so kicking off and jumping straight into it, obviously we've had the last few weeks continuing to be dominated by events, or the lack of events in some respects in the context of the Middle East. We've continued to see something of a frozen stalemate there. We've had a ceasefire now for a period of time. But all of the question has been whether we're going to see a lasting deal which will allow for the reopening of the Strait of Hormuz, and how long that's going to take. And effectively, as time has rolled on here, what has become more apparent is the US has, really been quite hesitant in terms of, re-escalating militarily, leading to an outcome where you could end up with, sort of, US troop losses, that sort of desire to disengage on the part of the Trump administration is something that I think has obviously been seen and inferred in the context of the corridors of power in Tehran, and so from that perspective the Iranian side have been able to position their stance in a way where they've laid out their stool, and effectively they've ended up waiting for the U.S. side to effectively compromise their own thinking and move towards that Iranian position. And so it does look like we could be moving towards a deal now, based on what we heard over the weekend. A deal which would see a reopening of the strait in the course of the coming weeks, but one where you'd continue to see this Persian Gulf Authority, continuing to effectively extract tolls from those transiting, the waterway at the same time.

Iran has been pushing for a lifting of sanctions on its regime. It's been pushing for an unfreezing of funds, and, one by one, it seems as if the U.S. is sort of caving into these conditions. But this isn't going down well in all parts of Washington, D.C, and Of course, over the last 24 hours or so, there's been pushback on what some in the US might regard as looking like a bad deal, and we've had Trump himself coming out saying there'll be no bad deal, there'll only be a good deal, and so we haven't actually ended up with a finalized outcome just yet. And just in the past 24 hours, we have seen some renewed low-level hostilities in the Gulf region there, with some U.S. strikes in the area, sort of, close to the point of the strait. And so, from that perspective, things remain a little bit fragile, and it does sort of highlight as well that even this sort of first step towards a memorandum of understanding.

Still then needs to, lead into more, developed, talks around, uranium enrichment and some of the other outstanding issues that will continue to persist. And so from that point of view, our own sense is that, look, there is a baseline scenario here where we're making some movement, some progress towards a reopening of the Strait. But ultimately, this sort of transit is going to continue to be a bit problematic for weeks or months still to come. There's likely to be these ongoing sort of periodic disruptions.

And moreover, we've done a lot of damage to supply chains, and inventories, and from that point of view, the impact, the negative supply shock that we've had as a result of the closure of the Strait of Hormuz is actually going to be an economic impact that continues to weigh on the global economy over the course of the coming months. So, this is the way that we've been sort of looking at this particular crisis, and

We kind of know that we haven't really seen the full economic impact or extent of this closure at this particular point, largely because in the initial stages, obviously, we've been sort of living off orders that had already been delivered, or living off inventories, and it's only now that we're starting to hit more of the supply chain sort of disruptions that are really coming through, and being seen a bit more tangibly, I'd say, in the economic data. In that context economic data over the course of the past month. We've seen some upside surprises on inflation. That's been true on both sides of the Atlantic. You see that in the CPI data. You see it even more worryingly in things like producer price inflation.

Here, we're seeing even, sort of sharper increases in input prices.

Which is a forward-looking indicator of further moves up in inflation that are likely to come. So, even with a Gulf reopening situation, we stand by the view that US CPI is probably hitting 4.5, 3.5 in the context of the Eurozone, and probably a number like 4.5 here in the UK as well.

Against that backdrop, we still think the ECB is going to be hiking. They're certainly going to be hiking at the June meeting. The question is whether they follow that with a hike in September, yes or no.

But I think, ultimately, the European economy remains weaker, so any hikes that we see in Europe over the course of the coming months.

We're more inclined to look for those to be reversed during the course of 2027, and consequently, when we look at, sort of, the short end of the European yield curve at the two-year point, we actually think yields there look a little bit cheap.

By contrast, when we look at the US economy, the US economy just looks a lot stronger, and you could sort of be sort of forgiven to come to the conclusion that actually what has mattered in the US economy this year hasn't really been events in the Middle East. It hasn't really been, actually, the tax cuts or the deregulation that occurred at the start of the year. Actually, the most important, the most pertinent driving force in the US now, continues to be this insatiable appetite for all things AI, and this intense period of investment spending that we're witnessing, which policymakers are sharing is a level of investment that is almost without precedent in terms of the speed in which this investment is actually being deployed in economic terms. And this obviously is something which is helping to, sustain a bullish outlook in equities, because you have these companies, like NVIDIA, generating a lot of earnings, but using those earnings in the context of vendor financing, in order to help those smaller companies and startups to place orders to buy their chips. And so there is this circularity of cash flows that we see, which needs to be discounted by a degree.

But this momentum that we're seeing in AI in the here and now is something that is continuing to sustain robust demand. And from that point of view, this shows up in terms of U.S. growth, U.S. GDP numbers.

And so, we continue to have thought that even as the Eurozone economy limps around with GDP likely to be between 0 and 0.5 this year, US growth looks like it's still set to be somewhere between 2, 2.5.

But within that, we would note that it's almost a tale of two economies in the United States right now, because although the business sector is looking a lot stronger, anything to do with AI is looking very strong. The reality is the US consumer is in a much worse position. You see that in the University of Michigan data released last week. We see this also in things like credit card lending as well, where there certainly is a sense that pressure on the US consumer is building, real incomes are being squeezed. And herein, you also see U.S. voters complaining, moaning about affordability. Inflation is unpopular. It's eroding living standards. And from that perspective, it's those high prices which, first and foremost, are continuing to undermine Trump's approval rating. And again, with an eye on the midterms in November, another reason, another imperative why this US president would like to draw a line under this crisis, albeit sort of getting to that particular point, isn't proving an easy path to navigate.

But when we look at the US, I would say here, if we do end up with a deal being agreed in the course of the coming weeks, and we're no longer talking about the Middle East as much, in the context of the US economy, the fact that AI is so strong, the fact that equity markets are so robust, financial conditions are very easy. We continue to see record volumes of corporate bond supply. All of this feeds into a narrative, if you like, which we continue to see more likely pushing inflation higher rather than lower. And so, from that perspective, we continue to think that too many folk are maybe a bit too sanguine in terms of the inflation outlook in the US for the time being. We think that inflation is likely to be a bit more problematic, a bit more sticky.

And partly this is going to be compounded by the fact that although a lot of people will talk about AI and how this is going to be wonderful, and it's going to boost productivity, and it's going to help bring prices down, I would sort of make the point that this may ultimately be the case in 5 or 10 years from now, and this works by actually helping to suppress wages, effectively, as AI replace workers, that can keep wages down, and that's a factor that will be subduing inflation and perhaps subduing interest rates, but in the short term, actually, the more important factor is this very aggressive deployment of cash in the economy. It's creating bottlenecks, it's creating price spikes, because ultimately, a lot of this investment spend is pretty price-insensitive. In many respects, there is almost a sense of an arms race here. It's a race to get there first. And you spend at whatever cost. And that speaks to an outcome which is more likely, we think, to be more inflationary in the short term. And so, this, on top of some of the supply chain disruptions that we've seen this year, this is a reason to believe that U.S. inflation is likely to be a bit more problematic. So, when I look at U.S. inflation swaps at 2.6 for CPI on a 5-year view, that seems to be very sanguine. Bear in mind that if the Fed is hitting its inflation target with CorePC at 2, we think that's consistent with CPI at 2.5. So you're only pricing, effectively, 0.1 on a year-by-year overshoot for the next 5 years, in terms of U.S. inflation versus its target. Yet, already today, we've got inflation at 3.8 in the US on the CPI measure, and we think it's going up to 4.5, which is why in the US we continue to like the idea of owning inflation break-evens in US swaptions and tips.

In Europe, we've also been enthused by the inflation story, looking for higher inflation numbers, looking at these PPI prints, looking at how that's going to pass through to a higher price spike. But in Europe, we see it slightly differently. We think this is more of a trade on real yields on an outright basis than it's a trade on the break-evens on inflation, partly because we think that although inflation's going to go up and that's going to lift yields up in the short term, ultimately, we do see those rate cuts being reversed in direction by the time we get into 2027. So, a bit of a different sort of nuance there.

Otherwise, in terms of looking at what's being priced, in terms of central banks, I've already covered the ECB, in terms of the Fed, the Fed, for the time being is on hold, but interesting to see and note how even Trump is changing his tune. He's now telling Walsh that he should do what he sees fit to do, effectively giving Walsh a freer hand. We've also seen people like Governor Waller reflect a more hawkish view in terms of the directionality of interest rates. And so increasingly now, it looks like markets are pricing the next move by the Fed as a hike.

So, I don't think we'll see a hike by the Fed in the next couple of months, but actually, it is now starting to look more likely that we end up with a hike as the next move. And unlike Europe, where we think any hike will be reversed into 2027, the fact that the US economy continues to look pretty strong actually is the reason why interest rates may go up a little bit higher from here, and then actually stay at those levels.

Arguably, you could actually make the point that Jerome Powell's decisions to cut rates towards the end of 2025 now are starting to look like a policy error. So strong is the US economy, and so concerning some of the underlying inflation dynamics, we would argue.

But, from that point of view, on Treasuries, it means no strong market direction, no strong market direction on euro bonds either, more tangibly, a preference for the front end of the euro curve, and otherwise, these views around inflation-linked bonds.

Otherwise, flipping across to the UK, we've actually had, in the course of the past week or so, a couple of better data prints for Q1 GDP. We also saw a much softer-than-expected CPI print. But we think some of this good news in the UK is going to be short-lived. We know that the outlook coming into Q2 in the UK economy is much, much weaker. We also know that the March print for CPI in the UK was always, or the April one, I should say, was always going to be a good one. It was helped by a reduction in the utility price cap. But come July, that utility price cap will be jumping by 13%.

And so, this is where we see the inflation reversal occurring. I'd also highlight to you, for example, things like, just take the price of milk. You can look at a commodity such as milk, and you can actually discern the amount of that, which actually is accounted for in haulage costs, back out the cost of diesel. And before you know it, we'd infer that wholesale milk prices are likely to go up around 20%. And so you can see how something like that feeds into things like food inflation. And so these dynamics, we think, will be an issue over the course of the coming months. At the moment, it feels like we haven't had the big impact from the supply shock just yet, but you can already see if you try and book air flights, for example, how prices have jumped in relation to what's happened on jet fuel.

We can see other price hikes coming. It'll be more prevalent in the data just ahead of us. And so, we continue to have quite a downbeat view on the UK economy from a macro perspective. We tend to be a bit more concerned about inflation. And moreover, we also have this sort of issue around political risk. And in this context, we've obviously got sort of an interesting moment ahead of us in the upcoming Makerfield by-election, effectively will end up with a small constituency in the north of the country. Effectively, it seems, deciding who the next Prime Minister of the United Kingdom is going to be. If Burnham ends up winning that by-election, it now seems almost a given that he will be installed in 10 Downing Street.

But it's not quite as simple as that. If you look at the polls, the opinion polls that we're getting in terms of that consistency, it's very much a two-horse race. In fact, if you add some of the Restore movement's votes on top of the reform vote share, you'd actually see reform slightly ahead of Labour at this particular point, notwithstanding the local popularity that Burnham is enjoying. So, we'll be watching that race fairly closely.

Now, of course, it seems that with an eye on becoming Prime Minister, Andy Burnham has been toning down some of his prior comments around not being in hot to the bond market and enforcing, or reinforcing the idea of, staying within the fiscal rules and being fiscally responsible. At the same time, though, we need to square this with this very clear desire that we are seeing within Labour to pivot in a more left-leaning direction, to more assertively increased taxes, more assertively increased spending. And I think the bond market's perspectives here are that if you end up announcing a big increase in tax and spend, what you will end up doing is you'll end up spending the money, but you could well end up in a situation where those tax hikes don't actually collect more tax revenue, they actually reach a point where tax revenues end up going into reverse. Almost this is the reverse outcome, if you like, of what we call Laffer Curve economics.

In the US, actually what we've seen here is in the US economy, we've seen situations where taxes have been cut. As taxes have been cut, that's boosted growth, that's boosted the amount of tax collection. However, if you end up increasing taxes beyond a threshold, and we're already at a very high level of taxation in the UK economy, at some point you start seeing tax hikes, hurting the economy, hurting growth, and you end up with tax collection being disappointing. And so, from that perspective, I do think markets will continue to have an issue with this agenda, and so we'll have to sort of see how this evolves, but for the time being, although gilt yields look optically interesting, we know that the UK is a more inflation-prone economy, we know it's a market where we've got more political risk. So, I'd rather take the stance of actually wait and see. If we do end up with a big blow-up in the UK gilt market once again, we think that that may be a better entry moment, rather than trying to chase yields in the here and now.

And otherwise, we'd have a context where we'd continue to rather be short in the UK pound.

Otherwise, just on Japan, here, we're likely to see a rate hike in June. The Japanese economy is doing fine. And actually, the big theme, the big noise coming out of Japan is about increased domestic investment in domestic assets. We can see this helping Japanese equities. It's starting to help Japanese fixed income yields as well. So this is a theme that we're looking for. We also think that this will be conducive over time towards a stronger yen, and the yen remains a very undervalued currency, and the one thing that the yen has needed is a closing of interest rate differentials, and so a rate hike in June will be important there, but we are more confident that that will now be delivered. And so against that perspective, we continue to like yields at the long end of the JGB market.

Elsewhere, globally, in credit, we continue to be more cautious, specifically in European credit. If we're flirting with recession, flirting with recession isn't really consistent in our eyes, our understanding as credit investors, with forever tighter spreads. Actually, if you're flirting with recession, spreads should be actually discounting the fact that there's more likely to be negative credit migration going forward, and impairment in parts of the credit market, particularly in areas like the consumer and cyclical sectors. So we feel that there's a degree of complacency in credit spreads, and would actually challenge the correlation between European spreads and US spreads. The two markets moving together. But we're looking at fundamentally different economy situations here, and so from that perspective, we continue to be more cautious when it comes to credit, but in places like emerging markets, we continue to have a world where we can pick the winners versus the losers. I think the one notable sort of place where we've been looking at over the course of the past month is maybe looking towards a peace deal in Russia, Ukraine, as Russia gets tired of conflict. But here, even if we move in that direction, we would observe that Russia is currently producing below OPEC quotas. This being the case, we don't think it's going to be a solution to the energy market. Moreover, we don't see Europe suddenly rushing to re-engage on reliance on Russian energy, so although it may be positive for sentiment in the short term, we don't really see it fundamentally changing the macro picture.

So we continue to see a volatile sort of path ahead of us as we migrate our way through 2026. It hasn't been, in some respects, an easy period over the last couple of months to navigate. And of course, these headlines, these tweets, these promises of a deal. When a deal never occurs, continues to be something which is creating and sowing plenty of confusion in the context of markets.

We think against that. It's important not to get sucked in, not to get carried away, because we would sort of note the fact that there is economic pain ahead of us. We do think there'll be further volatility ahead of us. I think that this is unlikely to be a summer that moves ahead quietly, so enjoy the weather while you can, enjoy the sunny conditions while you can, but there may well be some pretty nasty storms around the corner.

With that, I'm going to sign off and move to questions, because it's now 25 past, and I was picking up my phone in doing so.

The first of the questions are, long-dated yields have risen a lot in recent weeks, and they're now, popularly pricing the fiscal risks investors have been worried about for a while.

So, I think this is a good question. I think that, in many respects, the move up in long-dated yields has had more to do with inflation and a bit of a de-anchoring of inflation expectations. I'm not sure, really, it's necessarily been a move that has been sort of related to fiscal, per se. If anything, over the course of the last couple of months, we've seen a flattening of yield curves, as we've seen a bigger correction in what's discounted in shorter-term rates more than in long-term rates.

But all of that said, I would note that we've reached levels of yields. I think we surpassed a 30-year high in UK yields just recently before we've rallied off that. We've seen, US yields again reach the highest level. We haven't seen 30-year debt issued in the US above 5% since 2007. And again, we've seen that over the course of the past few weeks. So, it's been sort of a reminder that duration has been heavily out of favor, that actually yields have been selling off in what has been a bit of a bomb, bear market. Fixed income as an asset class has not really been in demand, or if there has been demand, the demand has been from people who want to own yield, and where people want to own yield and income, that's been supportive of credit asset classes. But when it comes to long-dated government bonds, we have highlighted, for example, 30-year JGBs.

30-year JGBs above 4%. That's actually translating into a currency-hedged yield in US dollars of 7%. It speaks to the fact that when yield curves are very steep, there's actually more carry. Yield curves that are very steep, then there is actually carry to be had in credit asset classes at this point in time, which is why we think that there should be more domestic demand, more stabilization at the back end of the market in somewhere like JGB's. But otherwise, in areas like Europe and the US, although yields look optically cheap compared to long-term valuations, we need to be wary of being, sort of, sucked in by the market. If you compare anything to… compared to the valuation in fixed income in the 2010s, anything looks cheap. At that time, yours were at zero, weren't they? And that was the aberration. I'd actually argue that the current level of interest rates is feeling more like a more normal regime.

And through those eyes, if we're currently around normal levels of interest rates, it's hard to make the argument that sort of longer-dated yields are particularly exaggerated.

Moving to the next question, is now the right time for the UK to consider emission of issuance of Euro-dated, sorry. Euro-denominated, UK fixed income by the UK government.

I think that this would be an interesting thing. I mean, if you did issue UK debt in euros, you'd probably ask yourself, where should that trade? I mean, we may not be a great credit, but I hate to think that we're much worse than France, or much worse than Italy from that point of view, so we might actually tap in to more fixed income demand if we were issuing more debt in dollars or euros. Obviously, humbling as that might actually be, and that's something that the DMO or the government may want to look at. Partly because the lack of natural buyers of UK fixed income have obviously been a factor that have been driving up UK borrowing costs, and anything that can be done to drive down UK borrowing costs will be a good thing. I mean, the one thing I've said about the UK before is that we're a market where, the guilt market has got just a ton of convexity. That is to say that if inflation goes down, and interest rates go down, it feeds back into a much better fiscal position, that then helps further that reduction in yields. So you're either in a virtuous cycle with yields moving lower, or, as we have been in recent weeks, more of a vicious spiral with yields going in the other direction, sending you more towards a crisis situation, and so diversifying funding sources certainly is something that makes sense.

And then, as a last question, for today, are markets too reliant on the assumption of a soft landing?

Well, perhaps so. I think there's this assumption that there will never be a recession. You could be forgiven for thinking that. You could sort of look at credit markets and think that credit markets are very comfortable with the idea that we won't see another severe downturn in economies, and policy makers will always be able to avert such recessions. Historically speaking, that hasn't been the case, and so from that point of view, where we see the inflation overshoot coming through in the coming months, of course, we hope that ultimately leads to a soft landing. That said, I think the bigger the overshoot on inflation, the more you need to do on policy to correct against that.

The more of the risks of a hard landing arise, which is why, if you do end up with renewed issues in the Gulf, if we do end up with oil going to $150, that is the moment that I think policymakers are having to react more assertively. That's the thing that really puts recession even more squarely in play.

With that, I'm gonna leave my comments there. Enjoy the sunshine, enjoy the warm weather, as I say, while it lasts. Thanks for joining, again today, and look forward to speaking again on this call in a month from now. Thank you, bye.