Hello there, and thanks very much for joining today's latest podcast that we're doing in terms of sharing some thoughts and views around global macro. If you haven't joined before, the format is I'll typically speak for, 20-25 minutes, and then, try and leave some room for some questions at the end.

But anyway, as perhaps I typically am inclined to do, I think it makes sense having a bit of a run around global views starting in the United States, and from that perspective, obviously, it's a very timely moment to be having this call with the Federal Reserve meeting just ahead of us on Wednesday this week.

Now, there seems to be very little doubt that the Fed is going to be cutting rates by 25 basis points this week. Arguably, there's a bit of a risk that they could go for a bigger cut, a cut of 50. But that said, I think that if we were going to see a bigger move, we would have seen, sort of more Fed chatter leaning in that direction in the days up to this particular meeting. And from that perspective, I'd note that in terms of market interest rate pricing. There's only about a 5% probability given to a 50 basis point move later this week.

All of that said, I think there'll probably be more interest around Powell's language, and a sense in terms of the trajectory of what can be expected in terms of the path of interest rates going forward from here.

We will have updated Fed forecasts as a quarterly meeting, updates to the dot plot, that obviously people pay attention to as well. And from that point of view I think compared to the last Fed meeting, there's been quite a lot of new information, particularly as it pertains to the labor market.

We have seen, a couple of weak payroll prints. In addition, a number of payroll numbers for prior months being revised lower. Indeed, the BLS last week announced some revisions to previously released data, which took away around 911,000 jobs in totality.

So, the picture for the labor market, I think, is a lot softer than the Fed was looking at before, and certainly it's on the back of that that we've seen Powell at Jackson Hole acknowledge and almost affirm it seems a move towards renewed interest rate cuts over the course of the months to come.

And at the same time, when it comes to inflation data, you would say that for all of the concern around tariffs, to this particular point, inflation has remained relatively well-behaved. Core CPI effectively continues to go sideways. It's been at 3.1% for a number of months. And from that point of view, I don't think there's anything that is unduly concerning to the Fed in the numbers today, particularly when you think that the core PCE inflation print, which is the one that the Fed really focuses on, typically trades about half a percentage point below where core CPI sits. And so, with that being not much more than 2.5%, obviously in the eyes of the Fed, it doesn't need to be a stumbling block towards renewed rate reductions.

Of course, the one thing that is keeping the Fed wary though is the idea that we just haven't seen some of the price hikes thus far. In totality, when you think about, sort of, the tariffs that have been imposed, the way in which you can sort of look at this in terms of the tariff revenue that's being generated here, we're looking at a number now which is probably about 1.4% of GDP.

And so, you might sort of wonder is all of that going to be passed on eventually to consumers, yes or no? Well, within the US administration, within the White House, when we are having conversations there, the thinking is very much that only a third of that 1.4% is going to get passed on anyway, with the balance largely absorbed in producer margins and increased efficiency savings.

And so, if the White House is right, inflation can stay relatively muted. And so, you can understand why Trump and those surrounding Trump are very much calling out the Fed on the idea that inflation's nothing to worry about, and at this particular juncture, there's no particular need to have interest rates above the Fed's neutral rate, which sits around 3%.

And consequently, they've been arguing for much deeper interest rate cuts. That said, I think mainstream economic thinking it's more inclined to think that around a full percentage point of price hikes does get passed on to the US consumers over the course of the months to come. And if that is the case, of course, that would take core CPI up towards 4%, and from that point of view, it will make it, more difficult, more problematic for the Fed to be easing as quickly at the same time.

And so, I think the question in terms of the ultimate path here for interest rates on a go-forward basis, a lot of this is going to come down to just how weak the US labor market is, and also what inflation is going to be doing over the course of the next few months. And so, with that being very much data-dependent, it's very difficult to really have, I think, a very clear view on the directionality of US fixed income assets right here.

The one thing that we would say, though, is that from where we sit, we do think that there is a more compelling view to be had with respect to yield curve shape. Now, for some time over recent months, we've been making a case for yield curve steepening, and indeed the curve has moved steeper over the course of the year thus far. But when we look at the 2's 30s curve, one of the things we've always observed is that curve steepening is much more typically driven by short-dated interest rates going down more than it is long-dated interest rates going up.

And so, from that point of view, if we're about to start a sequence of rate cuts, just here and now, we think we could be in a moment where this week and coming months we do see renewed traction back into yield curve steepening trades. And so, when we look at the 2's 30s yield curve as a proxy, for what we're really sort of focusing on, today we see a yield curve which is steeped by 115 basis points.

Now, that's fairly flat really from a historical point of view, and actually it means the US curve today is actually flatter than the curve in Germany or France or the UK or Japan for that matter. So, from an international context, for all of the concerns around sort of Fed independence or medium-term inflation risks relating to tariffs, that doesn't really show up in the US yield curve at all today.

And it would sort of suggest to us that there is room for this curve to steepen further, particularly as and when interest rates do move more materially lower. And so, from that perspective again the path that is projected by markets going forward from here has got effectively three cuts. Accumulative 70 basis points of rate easing is already discounted for 2025. You have rates coming down towards 3% by this time next year. This is pretty much where the baseline sits today.

That's one that we think is largely correct. At the margin we might be inclined to see a bit more easing rather than less easing at this juncture and that more comes down to the fact that it's not that we think the economy is going to be that weak, and indeed, tomorrow's retail sales might actually be quite a strong number. We're not that concerned about the economy, we're not worried, really very much at all at the moment with respect to recession risk. But we do think that we are likely to be moving to a Fed in the course of the year ahead which is going to be pivoting in a more dovish way.

We've heard from Trump that he's narrowed the field in terms of the prospective Fed Chair down to Kevin Warsh, Kevin Hassett, and Chris Waller. Now, with the exception of Kevin Warsh who has got a few maybe sort of questionable ideas in terms of managing the balance sheet, we would say that, on the whole, Hassett and Waller are both pretty mainstream Fed guys. And from that perspective, part of the recent flattening the curve in fact has been on the fact that we haven't seen a real maverick being introduced as a possible candidate.

But pretty much whoever ends up getting picked, we do think will be picked based on their sort of allegiance to deliver, the Trump agenda of lower interest rates, to deliver an outcome which is going to be supportive of the economy in that way going forward.

And so we would expect the Fed tacitly in the terms of its mandate in 2026 under a new Fed Chair, perhaps to be over-prioritising growth relative to inflation. And so, from that point of view, we do think the Fed, if there's a risk, is a slightly more aggressive, slightly more assertive Fed than a lesser assertive Fed. And from that point of view again that speaks to this sort of preference towards a steeper yield curve.

Indeed, having had sort of conversations with the US administration, I think that they're not at all uncomfortable with the idea of some yield curves steepening. One of the points that they have highlighted to me is their belief that actually inflation rates are probably more sensitive to 10-year bond yields than they are to cash rates. And so, if you do end up with the yield curve steepening, it actually means that interest rates have got room to go down by more rather than less.

Also in getting cash rates down this is seen as a positive facet if it encourages money to move out of money market funds. It's also seen as something which is obviously beneficial in the context of helping to fund the deficit, because in the USA today, there seems to be very little appetite for raising any taxes whatsoever. With the exception of tariffs, of course, and very little desire to make material changes to pare back government spending. And with that being the case, most of the deficit reduction that the administration is hoping to achieve is by locking in cheaper borrowing costs by effectively bringing cash rates down and then pivoting more of the debt issuance towards the front end of the yield curve. If you like more of a bills and chills strategy as they've been referring to it perhaps.

So, from that point of view, I think sort of the path ahead is this one towards a steeper yield curve. It's still an economy that's doing relatively well, I think, in 2026, bearing in mind that you'll have the benefits of monetary easing, tax cuts coming through, and also deregulation also benefiting economic growth. So, although we're in a bit of a slow patch for the economy in the here and now. I don't think we need to be overly concerned about a US slowdown.

And again, returning back to the topic of the US labor market, you should also bear in mind that, such as the clampdown on immigration, it effectively has stymied the growth in the US working, age population. And from that perspective whereas you at one point in the past, you needed to add 150,000 jobs every month in order just to keep a flat unemployment rate. Here and now today you only need half of that number. So, I think intrinsically we're going to get used to the idea of lower payroll prints come what may, regardless.

So, yes the economy is a bit soft in the second half of the year, but not to a point where we think there is any particular cause for alarm. And on the back of that it still strikes us that credit can continue to do okay. Ultimately, credit as an asset class does okay as long as you don't have a recession. And at the moment, we're not projecting a material rise in recession risks. And so from that perspective the recent rally in risk assets that we've been witnessing is one that we think can remain, largely speaking, intact for the time being.

All of that said, valuations aren't particularly appealing, spreads are very tight, so it's really about trying to look for the relative value, the pockets of opportunity where valuations are more attractive. Areas like Euro financials or certain tranches within structured credit are areas that we do think are cheap.

But by and large staying disciplined in terms of credit selection because if you own names that do go wrong, they most certainly will be punished and credit markets, when they're priced for perfection, they don't leave a lot of room for error in that particular respect.

But the other thing that we'd also sort of highlight is this US narrative, this narrative of lower interest rates is one that we think will go hand-in-hand with the somewhat weaker US dollar. We've been positioned short of dollars over the course of the last few months. The dollar has not really done very much at all over the course of the summer. But interestingly, in the course of the last few days, perhaps is starting to trend a little bit softer again.

We think that move can have legs, and certainly if the Fed does sound at all dovish this week, it could be a renewed catalyst towards a trending dollar trending back towards dollar weakness, because this is partly explained by a narrowing of rate differentials But also we see underlying asset allocation shifts as international investors maybe are reflecting more of a home bias in terms of their asset allocation, and are reflecting on the fact that, in terms of their allocation at this particular point, you've ended up with ever more centric US allocations

Given the way in which flows have gone towards US stocks, and US stocks have consequently outperformed, to the point, of course, where we see US stocks making up 70% of the global equity index, as things stand today. We think, therefore, this sort of overseas investment in the US may be reaching something of a high watermark, and so if we end up in a situation not necessarily with overseas investors selling dollar assets but just investing less towards the US than was the case in the past. Inevitably, that does speak to a somewhat weaker dollar than one that we have been used to.

Switching across tack to Europe and keeping my eye on the time here, I think from a European perspective, obviously things are still just getting going again after the summer. I think a lot of focus for us in terms of European growth and the delivery on the fiscal side, we're looking for this big announced German fiscal spending to be a driver of growth. But I'll just highlight, in the very short term, we're not seeing too much evidence of that really coming through. So if anything, growth is continuing to lag a little bit relative to what we might hope to be seeing.

And otherwise, I think you'd also sort of note here that from an inflation point of view, if anything, we're more inclined to look for inflation to go below 2% rather than above 2% in the Eurozone in the course of 2026. Certainly, if the Euro is relatively strong that would be a disinflationary factor.

Also, bear in mind that unlike the US which has raised tariffs actually, Europe has been in the process of cutting tariffs in order to get trade deals done with the United States. And so that's a disinflationary impact on things, relatively speaking, as may be sort of imports coming in from China, where obviously that sort of supply which is going less towards the US may actually have a, more of a deflationary impact in some other global markets.

So, this view on European duration is making us think about, sort of, moving to a more constructive view on European interest rates. All of that said, we've been quite wary based on supply and demand. At the moment there seems to be overabundant government bond supply, dwindling demand and this is particularly prevalent at the long-ended yield curves.

If I cast my mind back as an investor there was a time when we saw a lot of pension schemes demand a lot of long-dated government bonds, there was a big desire to match assets to liabilities. But the closure of many such schemes means that that sort of asset liability matching sort of demand at the long end now is much less than it once was.

And so intrinsically the demand for long-dated bonds has gone down at a point where government bond issuance has been going up and with many debt issuance agencies being relatively slow to adjust their supply schedules. This is another factor that has been weighing on duration, weighing on curves, not just in the US, and it's been a factor that has been impacting European curves, the Japanese curves, in the same fashion. And so that particular technical in Europe is a reason why we're less enabled to move to a more constructive duration view. But these are some of the factors that we're assessing.

Otherwise in the Eurozone, a lot of eyes on France. It's become apparent to us over the course of the last couple of weeks that a lot of political parties in France are massively committed to try and avoid new government elections. If there's new parliamentary elections hard right, the national rally will do well. Moreover, if they end up with a prime minister, you could end up with a law change, which would then enable Marine Le Pen to run for the presidency in 2027.

And so, it's the vested interest of all the other parties to try and stop elections. And so, consequently, we've ended up with Lecornu installed as a new Prime Minister. But that said, we think he's going to struggle to deliver much of a budget here. It's going to be difficult to get a compromise and get a budget done, and so it probably means a deficit again, which is going to stay above 5.5%. And with that being the case, we're likely to see further rating downgrades for France.

We saw Fitch cut France to A+ on Friday last week. We have upcoming reviews for Moody's and S&P over the course of the next couple of months, and from that point of view, even without moving to new elections, we think that French spreads are going to struggle to retrace very much. That said, unless there is a big new political development, we're not expecting spreads to go much wider either.

Otherwise turning to the UK, poor old UK continues to look challenged. We've got employment and inflation data in the UK just this week and I think the picture that we continue to see is one of a soft backdrop for growth. At the same time a concerning backdrop on inflation. We feel that inflation expectations have de-anchored, there's too much inflation in the economy, and effectively the UK is facing stagflationary risks.

Moreover, the government is in this difficult situation, going towards a November budget, not knowing what to do, facing a black hole, seemingly unable to tackle sort of runaway government spending, and therefore scratching around for ideas for how they can raise taxes.

But we have seen before how raising taxes can make the deficit worse not better. That certainly was the case with the NI increase recently. In as much as that added to inflation, it's added to the debt in a country where a third of the debt is inflation-linked.

The fact that you put up NI charges, that was just reflected in higher prices on the part of those firms being exposed to rising employment costs. Moreover, it's actually hurt employment. And so, from that point of view, policy measures have been enacted. They've done nothing to actually improve the fiscal situation. If anything, they've actually contributed to actually things getting worse, not better. And again, to be credible, we think that the government really needs to show that it can address welfare spending.

But also, it could be greatly helped if we ended up with the Bank of England doing sensible policies like ending QT, or the Debt Management Office, curbing supply of long-dated bonds. So, there are other levers that could be pulled as well, but it feels that all of the UK sort of policy-making at the moment is not really being coordinated in a fashion that does anything to help, only is tending to, hinder. So, we remain pretty downbeat in our assessment on UK assets.

Briefly in Asia, China we're still pretty downbeat. The property crash is going to take years, not months, to actually correct. And I think that creates a strong structural headwind.

Otherwise, in Japan the story for us again has been about politics. We're going to get a new Japanese Prime Minister next month. If it is Sanae, she has been more on a platform of wanting to ease fiscal policy, also wants to tell the BOJ to stop raising interest rates. If she wins I think that this will be bad news for JGB's, bad news for the yen. Conversely, if her main rival Koizumi is able to prevail, I think you may see a relief rally in the other direction. And I do think the momentum is more with Koizumi at this particular point.

So, we are more constructive in terms of the outlook for Japanese bonds, and also for the yen on a go-forward basis, and we are expecting the BOJ to be in a position to hike interest rates at its October meeting.

With that in mind, I realize I'm talking a bit too long here. I'm going to shut up, I'm going to turn over to questions. We've got about 5 or 6 minutes to go through some of the questions that you might want to ask online.

And so, turning across to my, phone, I've got “Views on UK politics with rising support for far-right figures such as Tommy Robinson?”. Well yes, I mean it was interesting, wasn't it? The strength and support on the streets of London over the course of the weekend, though I wonder whether many of the people who actually showed up on Saturday were people who actually knew who Tommy Robinson was, or what he actually stood for.

And so, if I really believed that there was as many Tommy Robinson supporters as that, maybe I'd be more concerned, but I think more generally what you're seeing is a rising sort of populist sentiment and a rising sense of frustration that the country is going in the wrong direction, not the right direction, maybe more of a hankering after more traditional values, and what have you. And I think all of this is more symptomatic frankly in the context of opinion polls and how the Reform Party is polling.

In terms of reform, I think if an election were called today, if you look at a website like electoralcalculus.co.uk, check it out if you've never looked at it, you'd actually see that were an election done today based on polls, reform would have a clear majority. And I do think it speaks, perhaps, to the fact that the UK has been moving in one direction, we could now see, a pivot back in a different direction, but it does seem that, as with elsewhere, politics in the UK is becoming more bifurcated between the hard left and the hard right.

This is a global trend, but a trend that is more likely to be exposed in a first past the post parliamentary system. And also, in the context of the UK and political volatility and financial market volatility.

The other thing that I'd say is that given our Liz Trust blow-up a couple of years ago, there's always a bit of an abiding sense that the UK can end up as a bit of a canary in the coal mine, which is an ongoing sense of some vulnerability.

Moving to the next question, “Thoughts on Japan curve moves? How would we be positioned?” Well, the Japanese yield curve has been very interesting this year. It's steepened a heck of a lot. Now we believe that actually the very long end of the Japanese yield curve has steepened way too much.

Intrinsically, this is because the individuals at the Japanese Ministry of Finance are issuing too many long-dated bonds into a market that does not want that tenor of assets.

To the point now where 10-year JGBs, a yield of 1.6, and 30-year JGBs are a yield of more than double that. A yield curve slope of over 160 basis points between 10s and 30s is pretty unprecedented, particularly in a developed market where absolute yield levels are as low as they are in Japan.

We think that's an anomaly, it will correct over time. I think that the Ministry of Finance in Japan will be well advised to stop issuance there altogether, and only issue long-dated debt again if the spread is below something like 50 or 60 basis points. I think this is the sort of advice I'd be issuing to many debt management offices at the moment, and certainly a theme that I'll be picking up when I travel back to Japan in a couple of months from now.

So, in terms of positioning, we do like the 10s-30s flattener as a core view, and also like the flattening expression in two's 30s as well.

And then perhaps a last question I need to read through is, what do we make of more and more houses becoming constructive gilts at these levels? Is most of the fiscal mad news priced in, and not too much priced in for the Bank of England, means risk-reward is favourable?”

The reality is that it's so complied, basically there's very little value content in a lot of that sort of recorded output in my mind.

The thing that I'd say in general is that some of the real money community is tending to be more constructive on the UK right now. The hedge funds I meet with, they tend to be sort of more negative in terms of their view on UK positioning, so it's still really quite split.

I would say that, not a lot is priced into the UK front end. That is something that I think is interesting, but the problem there is on inflation. And so, maybe if we end up with a weaker labor market print this week, and a more benign CPI print that's giving me more confidence that we might actually see some better news ahead of us on prices, then the UK front end may be attractive.

But at the moment, I struggle to move to that opinion, particularly if you factor in the political risks, because If we end up with Starmer out, and let's say, Andy Burnham taking over, I can tell you that UK assets aren't going to like it, and the Bank of England could even be dragged into a position where it's needing to hike to defend. So, politics are a clear and present danger here in the UK, and a factor that is kind of on my mind.

People have also said that actually it's not such a bad fiscal sinner, isn't some of the bad news priced in? Well, it's correct, we've got a lower deficit than France. However, because our absolute borrowing cost is at a higher level, it means that when you look at the percentage of GDP we're having to spend on servicing our debt, we've got more of a problem than other countries where those interest rates are much lower. But we can't get our interest rates lower because we've got too much inflation.

And so, therein is the catch. And so, it's that share of your GDP you're actually having to spend on debt servicing, your share of taxation revenue that's going on debt servicing that becomes a real problem.

And so, from that point of view, as we've seen in the Euro sovereign crisis, you reach a tipping point, which is with these sorts of yield levels, 100% of GDP, when you go north of about 5% on a 10-year, things will start spiralling out of control. And the UK, just a few weeks ago, wasn't getting too far from those sorts of levels, so this is why intrinsically I'd see the UK as potentially vulnerable.

But, as in all these things you keep an open mind and if the data comes out different, we'll be adjusting our view accordingly. And it's a reminder that, for all of our views, for all of our passion, we continue to need to do the research, to look at the data, to refresh our views. It promises to be an interesting few months ahead.

And with that, I'm going to sign off today. I think I'm sort of done on questions and on time now. Thank you for joining. I hope to see you again in a month's time for the next one. Thank you, bye.