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Merryn Talks Money
Markets Weekly: Tech and Crypto Slide, BOE Surprise, Turbulence for Gilts and Pound
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- [00:00]
A
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- [01:19]
B
Welcome to the Maiden Talks Money News roundup where we talk about the biggest moves in markets this week and what been driving them. I'm John Stepik, senior reporter, Bloomberg and author of the award winning Money Distilled newsletter. And joining me in the studio today while Merrin is away again is Marcus Ashworth. Marcus is by now a firm favorite and a regular on the Groundhog Day. Yes, yes, Toxitoni. Phil is with us today, expert on bond markets and European equities and everything else and a regular contributor. Great to have you with us again, Marcus.
- [01:50]
C
Always a pleasure.
- [01:54]
B
This week, this week, this week we've just had the bank of England's stunning hold.
- [02:00]
C
Quite exciting actually. Yeah, we're expecting Snoresville, but no, I think we're seeing that the bank of England are expecting growth for this year to be below 1%. That's down from 1.25 from what they thought in November. So that's a cut of course of growth. My word. But more importantly I guess is that they from November to this February, they have changed their forward expectations of inflation by a full 1% or 100 basis points lower than they thought it would be. That's quite noticeable. So half of that was from the budget. The other half is just inflation is coming out of the system. So why if we've got sub 1% growth and now therefore sub, sub 2% inflation, do we have interest rates at 3.75 we shouldn't and I think even they're realizing that they need to cut. So importantly one of the internal deputy governors, Sarah Breeden, moved across into the cut camp. So four people voted for cut, five stayed on hold. But two of those five, namely the governor Andrew Bailey and outside member Catherine Mann, made very clear that they would expect to cut probably next time or certainly by April. So it's either March or April. They will cut I think vote for a cut. So the market's not fully priced it in yet but it's getting that way. I think we've got two more unemployment data releases and one inflation before the March meeting so it could be as soon as March though I think we should just put our hopes on they will cut in April and more importantly they'll cut again this year at least once which they're starting to price in. They're realizing their so called neutral rate is more like three and a quarter than three and a half. Still got three people sort of in denial but then even their sort of arguments are getting a little bit weaker. They just think everything's sticky and nothing's ever going to change. But there are evidence signs and the key factor is unemployment. That's what they're really worried about.
- [03:58]
B
I know. So I noticed that Dave Ramsden, the Deputy governor specifically said we're very aware that unemployment is now above 5%. I thought that was quite striking.
- [04:08]
C
Well it was important to exactly got that spot on I think. And Dan Ramsden is pointing out, and he's one who obviously already would look to cut is that this is going to cut spending, it's cutting the economy and really not to be too fun about what Rachel Reeves has done is really impacting unemployment. It's people aren't hiring. It's not like they're letting people redundant in swathes thankfully yet but they are clearly not hiring and that is starting to impact and that's starting to impact on, on spending. So for the bank of England to expect growth to be below 1% I think that's quite important and clearly they're seeing inflation is just coming straight down and they're not as worried or anywhere near as concerned as they were that will be remain sticky. So another two possibly I think three rate cuts this year. I think it's quite possible if the numbers continue on this trend and that trend definitely not doesn't look good for the UK economy which is a bit, I think they've underclubbed growth to be quite frank. And one thing which is quite Interesting is they did emphasize that the state sector will continue to grow very nicely because it's been fueled by all our tax hikes. All those taxes are taking from us, John. They are feeling it into the state sector. Isn't that lovely? But the private sector not so good.
- [05:18]
B
But that is interesting because the, the point is that the bank has turned around. You know they must think the private sector is doing actually really quite a lot worse than we had thought. And I mean I can see that maybe part of this is because obviously the figures were quite disrupted by the pre budget fear again. And then after the budget there are a couple of signs that maybe everyone's a bit more relieved but that's not at all clear. And also the last employment figures it was very striking that public sector pay and obviously 7.9%. Yeah.
- [05:53]
C
And I mean what's the private sector.
- [05:55]
B
It was. No, wasn't it. It was three and a half somewhere.
- [05:57]
C
I think that you actually look at the running numbers 2.9 but whatever. But yeah. A big difference. Yeah.
- [06:02]
B
And I mean I know that there's you know they talk about basic effects. Yeah, yeah, yeah. Well okay. But we've got to expect them fall out. Does that mean that we should see.
- [06:11]
C
Well we had this in Germany as well. I mean to be fair the way it works is why inflation is so bad for the UK is because you have everything is ratcheted and indexed and the government sets all these things. A lot of these things are set in April which is why we know inflation will fall by 0.5% alone was the budget effects because she's got out of her own way this year which he made inflation much worse and therefore the bank of England's job much harder previous year. But this last budget she's worked that.
- [06:34]
B
One out at least one thing that also means that this year's competitives are much easier as well.
- [06:39]
C
Well, of course. So yeah, base effects again.
- [06:41]
B
Exactly.
- [06:41]
C
So the point here is that we have you know quite noticeable changes that the government has made mistakes on but one or two of them they are starting to get in their own way. But the base underlying case of the economy is monies are being pushed into the state sector and will continue to. That will hold the nominal level of GDP up not per capita but the normal overall level of of gross domestic product. But the shift is happening beneath that is that the state sectors can take a far greater percentage. You've got, you know these, these public sector pay rises are a legacy from the inflation post Ukraine and that's. That's still working through the system, but it's very, very hard to get the state sector to accept lower wages as we see this go on strike.
- [07:26]
B
And something I wanted to bring up on productivity because I've noticed people starting to talk about productivity picking up in the uk how much of that is specifically a function of this? The kind of end to labor hoarding, if you like. So as you say, because the kind of minimum wage is shot up and you know, employer national insurance is going on. Private sector employers, I find that too expensive to hire people. So basically there was an argument that they had perhaps hoarded people after Covid. And is it the end of that?
- [07:59]
C
That's definitely a part. I mean I could just try it out and say AI but you know, there's some of that not. Well, I think there is some of it particularly in graduate recruitment. But you know. Yeah, I think that is precisely that. Is that, is that particularly in hospitality, retail, construction, things like that, that where people were holding on to staff thinking they would have struggled to be able to hire them. Now it's the other way around. So that's, that's still got to work through. But so productivity I think is a very misunderstood concept and I think a lot of people put too much emphasis on. On being able to measure it. We can't work out how many people are in this country. How can we work out what productivity is? We can't work out what our labor stats are. I mean, you know, really, this is.
- [08:41]
B
A very good point. Yeah, sorry. But there you go. There's another reason to take productivity with a massive pinch of salt. Okay, so shall we move from the bank of England?
- [08:51]
C
Well, we can say quite nicely into. Into what's going on in the SAS offerings.
- [08:54]
B
What do you mean segue? I don't want to do that. I want to do a jarring transition.
- [09:11]
C
The, the software as a service sector had a rather unpleasant week, which may be because of AI and the productivity from leading less people to even to code. Even coders are at risk now, let alone financial journalists. So, you know, the reality is what we've seen is a very big shift beneath the surface in stock markets where you've had companies which have been doing very well the last few years selling software. At London Stock Exchange Group, we surprisingly hit hard. Sage, Experian, Relx, Walters, Klu. There's lots of names which have been doing sort of riding the tech boom and then they realized they're getting ser. Seriously differentiated now. So AI spend is going in certain places and it will kill the existing software sector really very quickly we saw some very savage stock market falls but at the same time also credit spreads widening out in some of these, even investment grade companies.
- [10:13]
B
Because a lot of this is also because the private asset sector is getting hit, isn't it? Yeah, Colleague Paul Davis is.
- [10:22]
C
Oh, I mean as in what? Yeah, the private equity, private credit sector in particular. Yeah. Because a lot of these are leveraged loans and sort of, you know, hard to visualize and they're there, it's very difficult to get a proper read on. So then we can look at is investment grade bonds, corporate bond spreads and they have widened somewhere some between 15 and 20 basis points which in itself isn't the end of the world but it is a definite re rating of the sector. And certain companies which are viewed as being, dare I say old economy in the new economy are going to hit hard. But what's also happening is if you actually look at the levels of the stock market, not just the FTSE 100 but particularly S P and this mirrors out across, you know, areas like Korea and Japan which are very tech sensitive. There's a massive rotation going on.
- [11:05]
B
Yeah.
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C
The factors of which, you know, an equity has been rated on are shifting and now we're seeing value stocks dividend, higher dividend paying more old economy stocks. I mean some of the best performing stocks in the S P were railroads and you know, and even of course the oil companies which have kept the stock market up. But a lot of money is shifting very quickly.
- [11:28]
B
Yeah.
- [11:29]
C
Out of out of favor software sort of technology which isn't quite keeping up with the pace with the new world and back into things which are much more viable and solid which is, you know, a stock picker's delight.
- [11:42]
B
So sell digital biophysical. Oh, thank you, thank you.
- [11:46]
C
You should be a journalist.
- [11:47]
B
I'll try, I'll try. But I mean, do you think so? I mean because one of the things that I know that our listeners will be thinking, they'll see the share price of stock like relics which has gone down by 14 in a single day. They love the look of that chart because what retail investor doesn't love catching a fallen knife? What do you think?
- [12:10]
C
Well, I mean there's definite, you know, if you actually anthropic are a bit bemused themselves that the so called sort of catalyst was, was this, this legal services sort of new, new tool which could cut out a lot of things. They don't actually think, I think it's that great themselves.
- [12:25]
B
So this is. These are the guys who create yeah.
- [12:27]
C
Yeah there's plenty of other, you know I'm not saying in the sector there's now a lot more and will be substantially more products. I mean I think topic itself launched 30 in January alone of across lots of different sectors doing different things and there's lots of competition in there and they're probably more worried about their own jobs ironically you know creating new new things with the AI itself will will self in that sense. I think there's a lot of interesting factors to weigh but probably this is overdone for I mean certain companies are just rehashing software and they are very vulnerable. Other products are still very valid and will have reasonable shelf lives. However, if you look out two, three years then that is the wider risk and that's why the sector re rated also suddenly because everyone suddenly realized that this is starting to happen. It's starting to happen. Immed and the legal services obviously this huge, vast amounts you will pay to our lovely lawyers. We wish we could pay them more but you know why, why are we paying or why are companies paying management consultants vast amounts of money? Well they, you know they get a well trained graduate to whack it into chat GPT and why do you have to pay someone you know x hundreds or even thousand pounds an hour to do something which you could do yourself.
- [13:47]
B
And well, and we are seeing that, I mean none of the management consultancies are listed as far as I can remember but we, you know we are hearing stories every day about the consultancies kind of have any cut back or.
- [13:58]
C
Deploy Accountants, accountants, lawyers, consultants are all going to find things harder, aren't they?
- [14:07]
B
Well I suppose it's interesting because we as journalists have been through this with the Internet. The Internet destroyed the publishing industry as.
- [14:16]
C
It was the interweb.
- [14:18]
B
Yeah, yeah, yeah that thing that was only going to have the same economic impact as the fax machine turned upturned book publishing, upturned music, all the rest of it. So I guess this is just a new phase for a different set of white collar workers.
- [14:30]
C
There's an awful lot of money behind it from Salesforce onwards which grown the vast, vast companies providing things which you know it's a rough crawl world because the turnover of products and the ability to self perpetuate and learn is going exponentially. So that is very hard to price and it all got priced in one day. But as I said some of this I think is permanent but still some of these companies may be very careful and do your own research. You may find there have been a little bit, you know, chucked out with.
- [15:00]
B
A bath water, I think. On that note, you can go and do your own research. You may even want to ask one of these newfangled AIs. I'm not having anything to do with them. Not training the competition, exactly.
- [15:16]
C
Foreign.
- [15:21]
B
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, keep sending questions or comments to marinmoneyloombear.net you can also follow me and Marcus on X. I'm on Stepeck and Marcus is arcusashworth. This episode is hosted by me, John Stepek and it was produced by Moses Andam and Samar Sahadi.
- [15:42]
C
Sam.