A (4:06)

One of the little phrases that has been sort of kicking around on my screen this week has been, you know, when you have some sort of financial crisis, governments or central banks can effectively just print more money and just push money into, into the system. You can't print oil, right? You can, you can release strategic reserves, but they have limits you can run out of. In theory, you can run out of strategic reserves just like you can run out of your normal reserves of oil. So that's why energy shocks tend to be so horrible for economies and for markets because you can't just turn it off. And that's basically what a lot of central banks have been alluding to in the past couple of days, which is we can see this wave of inflation coming our way, but first of all, we can't turn it around on our own. Second of all, we don't know whether this is just going to be a little kind of one off bump higher in inflation or whether it's a meaningful long term shift higher in inflation. Because that's, you know, very much what Powell was saying at the press conference yesterday was, you know, sometimes you get a shock from something like tariffs that makes prices go higher, but it tends to be a sort of a one off thing. It is plausible, like you say, that it leaks and it turns into higher wage Expectations, higher inflation expectations. It's tricky because there's so much pressure on the Fed to cut interest rates. That's obviously what Trump wants, but can it do it? If inflation really takes hold, it's really sticky.

B (5:37)

You can't print energy molecules. You can only print dollar bills.

A (5:42)

Yeah. You can't print molecules Even with clever

B (5:45)

3D printers, you can't magic them up. And I want to say something that I think was under noticed about Chair Powell's press conference. There was a sub theme there which was, you know what? Underlying inflation, energy aside, is not getting better as fast as we would like. Which gives an unpleasant context, this whole discussion. So the very first question asked in the press conference, which was asked by our former colleague Colby Smith, who traitorously went to the New York Times, she asked, yes, Are you guys going to look through inflation, oil price inflation, which is a question on everybody's mind, the Chair answers as follows. I'll just read this. I thought it was interesting. The thing that is really important that we need to see this year is progress on inflation through a reduction in goods inflation as the one time effects on prices of tariffs go through the system. I mean, this is a weird answer to that question. You know, Colby's like, oil and he's like, tariffs, you know what I mean? And the point is, we still have half a point of inflation or so that's in goods that they are counting on going away in the middle of this year. And if it doesn't, that makes the oil problem even worse. And then something else happened in the press conference, which was that another enterprising journalist asked. Well, I'm looking at these numbers here, boss. And actually services inflation, which is the one most closely connected to wages, which makes it the one that makes everyone nervous. Services inflation x housing actually isn't better either. What do you have to say about that, Chair Powell? And he said, it's frustrating, right? Yeah. Welcome to the party, Chair Powell. So actually there is a percentage point of inflation above target. We're at 3% plus or minus on inflation. We're supposed to be at 2% and it's services and it's goods and it's not going away. And that is the context with which we are walking into an additional, possibly inflationary shock from oil. So the context is bad too.

A (8:01)

Yeah, yeah. So stuff was bad and now it's worse.

B (8:04)

Yes.

A (8:05)

And so you turn from the Fed to the bank of England. Right? So bank of England today held interest rates at 3.75%. Again, boring. But the decision was unanimous. Which had not been anticipated. We thought there might be, you know, a couple of voices looking for cuts to interest rates. But also really importantly, they removed the guidance from their statement about the next move in rates probably being a cut. And this has smoked the gilts market. So UK government bonds don't like this at all. In if you have a situation where you have higher inflation and higher interest rates, that pulls down the price of UK government bonds and pushes their yields higher, which pushes up borrowing costs. Last time I looked at my screen, two year UK government bond yields were up a third of a percentage point today. Doesn't sound, Yes, I know that doesn't sound like very much.

B (9:05)

It sounds like a lot to me, Katie.

A (9:07)

That's bad.

B (9:08)

I, I can't think of a 30 basis point, two year debt. The last time we had one of Those, I mean, 30 basis point, that's a monster.

A (9:15)

So look, maybe that was, you know, the spike and that, that was the high for the day and then it kind of came back down a little bit. But the point is the shorter end of a uk, of a government bond market is the bit that gives you the best reflection for what the market thinks is going to happen next to interest rates. And so two years and five years, that's the part of the market that really feels the strain. It's just been absolutely smoked because the market had been expecting some more cuts in interest rates from the bank of England. Hunky dory, very happy at a certain point today and we're recording this on Thursday, that had shifted to the market fully pricing in two rate rises by the end of the year and maybe even a third. So is this an overreaction? Maybe. But I think we all know that the UK has got a bit of an energy problem. We need that oil, we need that gas. We're not going to be getting it. We. Where is the money going to come from to help people pay their bills? Well, the government's going to have to borrow some money to, you know, to pad out the finances. That's not good for borrowing costs. So I'll be honest, I'm not loving the sight of this very much.

B (10:21)

I would say not. I mean, for our civilian listeners, the two year bond yield, government bond yield is generally thought of as a kind of proxy for what central banks are going to do with rates in the coming months. Right. So you know, there's like this rule in finance, you have to say the policy sensitive two year yield and the policy sensitive two year yield since the beginning of the war in the US has gone from 3.3738% to 3.83. So it's more than a 40 base point. That's a meaty move. Which means basically something like two rate cuts that people had been hoping for have been unceremoniously removed from our projections. The market's projections of what the market is going to do. This is starting to get into economically meaningful territory. And you know, we've been saying on shows previous to this, isn't it interesting that the markets are taking this in stride? And now I have to say, maybe the bond market is not taking this war in stride after all. Yes, right.

A (11:35)

And stock markets can ignore oil prices for a bit, but, but, but stocks, investors are really scared of the big, big bad bond market. And if the big bad bond market keeps on doing this.

B (11:47)

Yeah. Eventually the message gets through.

A (11:51)

Yeah, exactly. They're more scared of bond yields than they are of oil prices. So then, yeah, we had the European Central bank again held rates at 2%. Boring. The sixth meeting in a row they've done that. Also boring. But they said soaring energy prices are going to have a material impact on inflation in the short term. They think inflation is going to head up to 2.6% this year. They were previously thinking 1.9. Again, I know to normie civilians, that doesn't sound very much. That's a lot. Meanwhile, they lowered the economic growth forecast to 0.9% from 1.2 previously. Now, I know 1.2 is not very much to start with. Maybe we're kind of, you know, bald men arguing over a comb, but that's not great. If you have slowing growth and you have accelerating inflation and you have an energy shock that central bankers can't fix on their own, then we are approaching what I like to call squeaky bum time. This is getting butts.

B (12:55)

Bums. We have a lot of rear end activity on the show today.

A (12:59)

It's all going on.

B (13:01)

I mean, look, The S&P 500 is starting to notice since the start of the war. The S&P 500, the most resilient stock market in the world is, is down

A (13:12)

about 4% this year. Right.

B (13:14)

5% just since the start of the war. So that's not nothing. And no, there is an irony here, which is that Europe and Asia are suffering more from America's decision to go to war than America is.

A (13:33)

Again, thanks for that.

B (13:34)

Yeah, your, your economies have less kind of margin for error. You know, we went into this situation with stronger growth rate and quite low unemployment and all the good things.

A (13:46)

Stacks of your own oil and stacks

B (13:48)

of our own oil. So basically, you know, the inflation problem is going to be worse for Europe and Japan than it is for the United States. And the really hard decisions that, you know, central bankers, policymakers, investors are all going to have to make are going to fall the hardest on places like

A (14:05)

Japan, Europe, the uk, Southeast Asia, like Thailand, Philippines, Malaysia. They, they need those energy supplies. And also there's an oil analyst I was speaking to earlier today, and he was saying, you know, the, the tragedy of this is that, you know, oil products are really important part of manufacturing fertilizer. This is an important part of the food chain apart from anything else. At some point, this will translate into higher prices for the food on your plate, which it's kind of all well and good. Perhaps if you're Rob Armstrong, it's less all well and good if you are in, you know, a poorer country like Thailand, Malaysia, Philippines, there's going to be an awful lot of people who are going to feel this, this damage in ways that they perhaps hadn't anticipated. And again, I think we've mentioned this on the show before, but like, analysts in the oil market are like, freaking out here.

B (14:59)

They've never seen anything like this.

A (15:01)

No, they're saying this is like, this is Covid size horrendousness. And it just feels a little bit today because we have central banks that have said, yeah, this is slightly horrendous, actually. This feels like it's just been the point at which, like a lot of people in stock markets and bond markets sort of wake up and think, huh, maybe this is not just some sort of little, you know, storm in a teacup in energy markets. Maybe I need to worry about this more than I have been so far.

B (15:31)

We don't know how long this war is going to last. And I think the takeaway from the show is this. So far, most risk asset markets have been able to take this war very much in stride. But in the last few days, we have seen the bond market start to change its mind. And this is a serious development that investors have to take seriously.

A (15:58)

Yikes. So I'm afraid, listeners, not much to cheer in the podcast today. Nonetheless, we'll be back in just one minute with Long Short. It is time for Long Short, that part of the show where we go long a thing we love or short a thing we hate. Rob, what you saying?

B (16:22)

At a bleak moment in geopolitics and a freezing cold moment in weather in New York City, I am long the NCAA men's basketball tournament every year at around this time when all seems lost, we have this great single elimination tournament and all these weird teams you never heard of playing each other. And it's just like an affirmation of youth, life energy. And I'm rooting for the Prairie View A and M Panthers, who are of 16th seed, taking on the number one Florida Gators tomorrow. Let's go, Prairie View.

A (16:59)

That sounds like the FA Cup. The magic of the FA Cup.

B (17:03)

There you go.

A (17:04)

I am short black snot. So it used to be that when you went around old London town like, you know, 10, 20 years ago, you would come home and you would have black snot in your nose. However.

B (17:21)

What, because of pollution?

A (17:23)

Yes.

B (17:23)

Were you still burning coal? Were you born in like Dickens, England? I'm Tiny Tim has black snot. Again,

A (17:34)

not quite as old as you. However, I'm excited to report that London is among 19 global cities that have achieved remarkable reductions in air pollution. Slashed levels of airway aggravating pollutants by more than 20% since 2010. You can see it in the snot and it and your snot is not black anymore. So yes, short black snot, long London air quality.

B (18:00)

Further, this is Unhedged, the Snot podcast from the Financial Times in Pushkin. I'm Katie Martin and I have a healthy airway.

A (18:11)

We will be back with more searing snot analysis on Tuesday. So listen up then. Unhedged is produced by Jake Harper and edited by Bryant Urstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forehead. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alastair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free and a 30 day free trial is available to everyone else. Just go to ft.com unhedgedoffer I'm Katie Martin. Thanks for listening.