← Merryn Talks Money
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C
Welcome to the Merton Talks Money Market Wrap where we talk about the biggest moves in markets this week and what's driving them. I'm John Stebbick, sen reporter and author of the Money Distilled newsletter. Merrin is off on the slope somewhere, hopefully not falling over. So I'm stepping in to lead this week's market debrief and with me in the studio, as always, is Bloomberg. Increasingly, as always is Bloomberg Opinions, Marcus Ashworth and a new guest. So from our Marcus Today team, Morwenia Conium. Thanks for joining us this week, Morwenna and thank you once again, Markus, very good of you as always. I thought actually we'd start with Morwena because so Morwenna goes, you need to watch this blog on the Bloomberg website Markets Today. And this is basically the rolling market report and Morwena is one of the great reporters on there and she's been covering it closely this week. So I just wanted to say what's the thing that stood out to you most? What's the big story this week? Morwena?
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Inflation started off on Tuesday when we had labour market data which showed wage growth slowing, the pace of increases slowing a lot more than had been expected. That put the wind in sales of those who are looking for the bank of England to cut interest rates sooner rather than later because obviously if wages aren't increasing as fast, then that suggests that that pressure and inflation is coming down. And we actually saw markets adjusting their bets on interest rate cuts from the bank of England to fully pricing in, at one point, a cut for April and over. Sort of 70% chance of that happening as soon as March. What we thought was going to be the really big story was actually inflation data on Wednesday. CPI reading, and that is the final CPI reading before the March interest rate decision from the bank of England. It was expected to show inflation had cooled and it did, but the reading was actually in line with expectations. There were a few pockets of things that were slightly higher than we'd have liked to have seen, but it really did solidify that narrative of disinflation. We didn't see a huge change in what traders were expecting from the bank of England, but it certainly didn't alter what had already happened the day before. We've seen the pound therefore coming down this week quite substantially, and that's actually been added to today by policymaker Catherine man, saying that the inflation was better than she hoped it would be, which suggests that the balance may well be tipped in favor of a rate cut very, very soon.
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I got the sense certainly from just the vibes of the last meeting that basically Andrew Bailey is now looking for an excuse to join the dovish side and the bank in general is now more freaked out about the employment market than it is about inflation. I don't know, Marcus, you've been talking about this quite a lot in the podcast. You think they're behind, don't you?
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Oh, completely. And I think I think they should have cut last week or whenever it was February 5th. Pardon me, but I think they. The reason they didn't was they hadn't prepped it. But I think Bailey was literally needs an excuse not to cut. I think man, as M is saying, would almost go 50 basis points now. She's quite mercurial. Yeah, I definitely think Taylor would and probably so would Dingra. So I think they'll almost certainly cut on March 19th. I think they will cut again, possibly the next meeting, but certainly by June, and I expect a further one later in year.
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C
They missed the boat this year.
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I've long thought that. And I think that they've got. They missed the boat. They made a policy mistake. I don't know what Hugh Pill is on. He thinks interest rates should be higher. Um, so the one to watch is Claire Lombardelli, I think, who is quite hawkish and she actually moved much more sort of neutral last time around. So I wouldn't be surprised to see a 7:2 vote even for, for a cut. But yeah, we've got, we've got some serious problems and youth unemployment is coming front and center everywhere. I mean I don't really trust any of the OECD data. However, when it's useful I'll choose it. And this time around they're actually saying that youth unemployment in the UK has actually risen above the EU average. That is shocking. And it's not just down to this current government, but this current government is making it worse. And largely as it's coming from all angles against retrore, including the ifs are saying that minimum wage rises and particularly this sort of 18 year old by upping minimum wages for 18 years, it's priced in the amount of jobs market. We all know the graduate situation is pretty poor, but the 18 to 25 bucket is in unnecessary stress. There are lots of medical reasons apparently behind it. But I think the government is going to have to and will backtrack on this fairly soon, I think.
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C
How do you think that may occur? I mean do you think they'll. Because there's two issues here aren't that. One is that the minimum wage itself is very high. It's one of the highest in the world relative to the median wage. So it's about 66% which is the kind of target. But obviously people don't consider that. That's much, much higher in the northeast of England than it is in London for example. But there is also this other issue of them. Basically there's a lower minimum wage for 18 year olds than there is for 25 year olds but they've started to harmonize that. So basically it's going to cost you almost the same to pay an 18
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year old and it's much more expensive to hire people anyway then this is the point. The people who are going to be mostly joining will be the younger ones coming in as trainees or whatever you want to call it, but particularly in hospital, in retail and even in construction and those areas are getting killed.
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I was going to say the, the increased national insurance and employers and the budget before last mostly impacted those kind of businesses which have a lot of employees, you know, all of whom they now who may be nearer the minimum wage, they're going to have to pay more on that. But also the national insurance contributions going up. And so it seems to be impacting the same group of people.
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Unfortunately we're having what's a slightly strange labor market. It's not so much people getting fire is employers having been sort of holding on to employees post pandemic worried there wouldn't be a replacement, are now not hiring. It's a lack of hiring which is coming through and therefore as the youth come through and we'll look for jobs there aren't the jobs there and you
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know, suggest interest because on this, because I do think this is quite interesting because there's that thing where, okay, so the economy is in a sticky situation but it feels as though if we get interest rates coming through and if the government doesn't keep going in the direction it's been going in, then there's still a chance to save things or turn things around or make this better this year. I don't know. What do you think, Marwena?
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I mean it's difficult to backtrack on things that they've announced as their flagship policies.
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They're at 15 now, I think let's count on U turns.
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That's true but usually after, usually before they actually announce them. I mean it feels like they've announced lots of things and you turned on them. But usually, you know, is. I think it's a tricky one and whether we see, you know, wage inflation continuing to sort of come down overall probably also kind of makes a difference as to expectations at the top of the pile. So I don't, I don't know whether it's something that they can easily resolve. You can't stop people, people kind of progressing through life, graduating. You've got a population that you've got, you've got the employment needs that you have. It's, it's a really tricky one.
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E
I think we haven't had the Employment Rights Bill really yet kick in. And that's another thing which is going to hurt the employment, you know, because it makes it again, much more expensive for employers are going to have to give rights much earlier and don't have the ability to be, say hire and fire or you know, people don't work out. And then we also have the Renters rights Bill coming through which is again going to impact on the, on the housing market. So there's a lot of stuff to come through which could be worse. Having said all that, I'm actually quite optimistic on the UK economy despite the best efforts of this government.
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C
Give us the bullish case then.
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E
Well, I mean we are seeing bank of England saying 0.9 this year. I think that's too low. I think we will be in the early mid ones. We're saying definitely. Oh yeah, absolutely, yeah. You know, I'm bro all around but I mean it's, it's to My mind what's impacting is the shift from the private sector which has been hampered by all the things we just mentioned and the state sector is still waiting for the big boost coming through from all the various plans that all the taxes and all the various different measures we spoke about were designed to raise money for. So I think the state sector is in rude health in that sense. And we saw the last data that the strongest bit was very much government spending. I think that's a ongoing trend. However, this private sector real data, particularly things like purchasing managers surveys, even the British retail consortium sales are actually more optimistic than I think we would have thought. This always the first quarter in the uk, maybe it's our seasonals in our stats, I don't know. But the first quarter is normally pretty strong and it looks like this first quarter is going to be again quite good. So I'm last half full.
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C
Well, that's good. And obviously if interest rates come down, housing market maybe kicks in a bit and it's been really weak for a good couple of years now, so presumably it can get better and rents have actually.
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Well, the pace of rent increases has been coming down quite substantially and it's, you know, in London even, you know, we're seeing it sort of the lowest rate inflation I think since the peak in, in 2024. You know, it really has come down a lot and so that helps. Interest rates coming down may help landlords further, although I think there's quite a lot of other things that need to be done to help landlords further to make that a more attractive proposition. But I think, you know, you've got certainly some backgrounds and like you said, the purchasing managers surveys are indicating increasing confidence perhaps now some of that uncertainty from the last budget has passed. I don't think we're necessarily expecting the same kind of drama around the next one. We haven't been talking about it so much yet. This time last year we were already on it.
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The statement last year was. Was an important thing because they missed this time around we're led to believe March 3rd I think is. It will be a non event so. And yeah it looks like the headroom. The headroom very boring. Ongoing problem looks for the moment not to be an issue and that. That I think is more saying is this
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bond yields actually coming down as well means that the government does have more money potentially. So that's good for everybody.
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We hope it just. They would be a lot cheaper if it wasn't for the political stramash.
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Still priced in to an extent.
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There I think it's gilts are 40, 50 basis points higher than they would otherwise be if we weren't worrying about from one day to the next the fate of who will be leading Covenant.
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Yeah, I know that'll be interesting because obviously next week we've got that big by election and then may we've got more elections and that'll all be kind of tripwire points for Keir Starmer presumably. But I guess we just have to wait and see what happens with that. But no, there was another big story this week. A massive name in the city. Another kind of monster UK asset was snapped up by foreign buyers. Marcus, would you make of this Schroeder's deal?
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Well, I mean, I think ever since Bruno Scherder died and his daughter Leone sort of essentially became the most important person represent the family, it always looked like she wanted to sell. And I think that's clearly what has been shown is it's they wanted to sell all of it and they want to sell all of it for cash. And they found a very interesting buyer. Nuveen is not a very well known name in the UK anyway. I wasn't sure it was a cleaning product at first, but it isn't. It's a very long old company based in Chicago, but it's owned by the Teachers Pension Fund Insurance and Annuity association, which is a big thing in the States, you know, and this is, this is legacy money. This is retirement. Very safe, secure. But they're actually really smart guys and I think they've had the strategy for quite some while within what they're doing in the States, from private equity to private credit to all sorts of different types of things and. But they've realized that the one big missing point they've got was exposure outside of the States. Now as the dollar we've seen has weakened 10% or so this year, a lot of US money, not just foreigners putting money into US assets, they're going to have to think about, okay, maybe we hedge our dollar exposure, but also American investors thinking, well, hang on a second, do I not need some offshore exposure? It could be emerging markets, could be in commodities. It doesn't have to be in Europe, but it can be in Asia. And the one thing that Schroder's got is large exposure. It's got three joint ven ventures, China, India and Japan, and obviously a huge suite of products in Europe and the uk. And I think it's a very interesting move for them, for teachers and even to gain, you know, extra trillion dollars worth of assets. It's probably cheaper for them to buy an old city name which wanted to sell than buying in the States, get some better diversification.
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C
So you're sort of seeing this as part of the dollar hedging story almost.
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E
Yeah, I think it is. I think, you know, obviously the big blackrocks and Wellingtons and fidelities have long been offshore but a lot of the sort of endowment money and university and all that sort of stuff, money in the States and there's lots and lots and lots of it. Pension funds haven't got much exposure offshore and this is a very smart move I think, for teachers to offer a wide range of products at a cheaper price for them and it gets them, you know, exposure outside the dollar and offers their internal client base a lot more options. There'll be a lot more, I think. I'm not saying it's time to buy Aberdeen or there are other different companies that might be in a comparable situation to Schroeders, but certainly I think US money managers buying overseas money managers is. I think we'll see more of that.
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C
Oh, okay, that's interesting because that whole sector in the UK has been kind of armored, hasn't it? I can't remember if it's come back a bit now, hasn't it? But it's still one of the cheaper bets. Did you see the fund management, asset management area?
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D
Yeah, the AI scare trade. Oh yeah, of course that is so I mean already, yes, we do have quite a lot of value potentially in stocks. They are relatively cheap but they're particularly quite a few sectors which usually would be immune from all the technology hype. I suppose this week were impacted because it sort of started to seep into areas that had previously been seen as very unexciting, like sort of software information firms and publishers and, and wealth managers. So that did take a chunk out of those. But like you said, they have mostly recovered a little bit this week.
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C
Well, it's interesting because the F100, I was checking the stats from the start of the year and actually we're up about 8% this year vers whereas the S and P is flat and I think Japan's the best. It's up about 12% but in sterling terms. But I mean if you've been. Have you been noticing that or not so because obviously the FTSE 100 has been doing quite well. Was the 250s still lagging a bit? Any signs of a shift into the mid caps or.
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D
Yeah, I mean they have been favored by quite a lot of strategists coming into the year. And I think we are seeing quite a bit of value still to be found in those mid caps. Of course, when you look at the FTSE 100, you have a lot of effects from the dollar actually, because a lot of them earn their earnings overseas, particularly in US dollars. So you have a huge currency effect there. And the FTSE 100 is also driven by these big international companies which have had a lot of strong drivers this year, like miners, I mean, precious metals have been absolutely through the roof and that's really benefited those companies. Defense has become another theme. So there's more sort of thematic trades I think going on that are helping the FTSE 100, which aren't necessarily about being in the UK, whereas I think when you're looking at the mid caps, then they are generally under undervalued and we have started to see, I suppose sometimes it misses out, but sometimes it's been relatively steady.
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E
And even energy, I mean, especially if we get something goes on in the Middle east over the next few days, which is a possibility, you know, energy is doing better, you know, and that's, that's a definite reevaluation of lots of different types of industrials and consumer staples and, and you said sort of value. And the old companies that earn profits and pay dividends.
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D
Shell, biggest company in the FTSE 100, you're always in the top three. Market caps change. That's a big driver of overall success.
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C
Yeah. So old fashioned stocks still doing well. Watch the oil price, look out for. I mean, you were saying earlier on you thought that maybe something might happening around Spanish. What gives you that feeling?
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E
Well, two reasons. One, because if you remember the lead up to the Ukraine war, everyone went, oh yes, he's putting all these, Putin's putting all those troops on the border and. But he won't do it, will he? Well, he did and he did because there was a sense of momentum. And I think when you have two sets of aircraft carrier fleets, there is a momentum there whereby, you know, you have to think, well, if a deal isn't shown from the ayatollahs and the Iranian regime fairly soon, which is exactly what Trump wants. And it's going to be quite hard, I think, to resist that sort of momentum. So, and I think to my mind, I cannot see Iran backing down and therefore I think there will be a, almost a. Yeah, we obviously fall into war. But I mean, I think that's a high chance that this is not backing down. And the more and more munitions have been put in the zone, it becomes almost sadly self fulfilling.
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C
Yeah. Okay. Well I think, I think when that one we'll, we'll wrap up and we'll have to see what happens when that bombshell. We'll need to see what happens next week. But. But yes. No. Well, thanks very much for that, Marcus. And thanks very much for weather. Thanks for listening to this week's Merlin Talks Money Debrief. If you like our show, rate, review and subscribe wherever you listen to podcasts. Also, be sure to follow me and Merrin on x Twitter Merryn's ErinSW and I'm JohnStepic. This episode was produced by Summer Saddy. Production support and sound design by Aaron Casper. Questions and comments on this show and all our shows are always welcome. Our show email is merrinmoneyloombird.
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D
Com.