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- [00:00]
A
Foreign. It looks like the US War with Iran is back on. The US Is dropping bombs on Iranian infrastructure and Iran has been firing on commercial shipping in the Strait of Hormuz. Here we go again. Donald Trump has declared that as far as he's concerned, the ceasefire is over. Now, markets are a bit spooked. Oil is up about $80 a barrel. It's not like March. But the question is, is this enough to push inflation up and force the new chair of the Federal Reserve, Kevin Walsh, to raise interest rates? After all, today on the show, it's war and wash. This is Unhedged, the Markets and Finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a markets columnist at the FT in London Stock. Joining me down the line from Brooklyn, New York is Rob Armstrong off of the Unhedged newsletter. Rob, who are you supporting in the football now that the US Is out?
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B
The Britain soccer cats out of allegiance to you, Katie. I have a lot of friends over there and because of that I'm rooting. I'm hoping that it comes home briefly before it goes back to France.
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A
Okay, good. Thanks. Thank you for your service. So, God, war again. Really? Why? What's going on?
- [01:35]
B
Well, I think, you know, we now have learned that Trump announcing that the ceasefire is over tells you that the ceasefire is over right now on Thursday at 9:46am Eastern Time. But it doesn't tell you very much about whether the ceasefire will be over on Friday. Even saying that the fact that missiles are being shot and shipping is being disrupted has to change your calculus of the situation, even acknowledging that it could all be different tomorrow. So it matters. And look, oil is telling you that it matters some. You know, we had a, whatever 5% raise, 5% increase in the price of Brent yesterday. And that shows you that despite the vicissitudes of this conflict, you have to take it seriously when the missiles start to fly again.
- [02:26]
A
Yeah, I mean, cynics were saying right from the start that the, the ceasefire wasn't worth the paper it was written on, if indeed it was ever written on any paper in the first place. So it's not a huge surprise. But so there's a few interesting things going on here. As you say, oil is back up about $80 a barrel. It was getting close to about 70. So, you know, had a decent move higher. And one of the things that happened earlier this week was when, when this all kicked off again is that government bonds took a knock again because as listeners to this show well know when you get higher oil prices all Things equal, you get higher inflation. Bonds really don't like inflation. So that pushes the price down and it pushes the yield up and it pushes borrowing costs up for everybody and it's generally bad. Yes, and we've had another flicker of that over the past few days. And that kind of collides with another big market event that we've had this week, which is the minutes from the first meeting of the Federal Reserve under the new chair, Kevin Walsh. And we'll come on to the details of that in a minute. But what investors are saying to me at least is, okay, we understand that Kevin Walsh wants to say less. Like arguably we should all say less. You and I should possibly shut up.
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B
But Kevin Walsh, people have been saying this to me for some years now.
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A
Katie, One of the things people say to me about why they like this show is that it's short. Make fat what you will.
- [03:52]
B
The food's lousy, but at least the portions are small.
- [03:58]
A
So Kevin Walsh likes saying less. All power to his elbow. But one of the things that that means is that investors kind of don't know how to read him and they don't know how to read the Fed and they don't know whether this kind of pop higher in oil prices means they need to think again about what they think the Federal Reserve is going to do next, whether it needs to raise interest rates. So we're just sort of in this sort of soup of confusion and trying to double guess what the Fed does.
- [04:28]
B
Well, take a step back because I believe, and I think a lot of people believe that for Kevin Warship, the confusion and the volatility is somewhat the point, I think, of his or one part of his kind of philosophy of, you know, finance and economics over the last 15 years is that it has been anesthetized by a Fed that is too activist and a government that spends too much money. And there needs to be kind of more free market, free for all, laissez faire, what have you, especially in financial markets. So I think part of the reason he wants the Fed to be all oracular and not say very much, it's like a little bit more volatility and a little bit more you guys. Figuring out yourself injects caution into markets might make them more stable over the long run. You get some short term volatility, but people pull their risk in a little bit. All of this good stuff. So I think Kevin Warsh would listen to you saying, I'm talking to bond traders. They don't know what the hell's going On, I think in his heart of hearts, he's probably listening to that and saying, good. That's the point.
- [05:42]
A
Yeah. Look, it's not the job of the Fed to hold the hand of people who trade government bonds for a living. And, you know, I totally get that. All I'm doing is, like, observing that. I do think this is, like the first taste that we've had under the new wash Fed of outbreaks of volatility that are possibly slightly larger than they necessarily need to be because of this uncertainty over what this means about how the Fed thinks about the world. So we had minutes from the Fed earlier this week, didn't we? This was the, the first rate setting meeting under Kevin Walsh's chairmanship. They kept rates on hold, but what did they say? Did we learn anything more about how he intends to operate?
- [06:24]
B
Let me just first say I was slightly worried going in that there would be no minutes at all. And I'd had nothing to write about. But so we got, we got some minutes. Louis Ashworth over at Alphaville wrote a good post about how it was quite a bit shorter than your average set of Fed minutes, but it wasn't a haiku or anything like that. And what, what I would say, what I would say about that is we had a mystery after that meeting back in June, and the mystery was, why don't you just raise rates? War sits there and he says, inflation has been too high for too long, and the reason it's been too high for too long is because of bad monetary policy. I am the new monetary policy boss. We're going to get this right. And so the question is, if inflation is too high and the problem is monetary policy, don't you want to change monetary policy?
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A
Maybe. Radical.
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B
Yeah, you know, so why didn't he say, okay, and we're going to start the bidding with a quarter point increase in interest rates. The minutes overall were pretty anodyne, but they were sprinkled with these comments that were like, yeah, you know, maybe the risk of inflation is more to the upside here. Some members of the committee made the case for higher rates. The level of uncertainty is high with the war in the Middle east and with tariffs and with everything else. And so if anything, it deepened my question about why aren't we doing rates now? And maybe it made me think we're more likely than before I read them to get a rate increase at the next one or two meetings.
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A
We've chatted about this on the show before, haven't we? Like Kevin Walsh has been very clear about this, he doesn't want to give what we call in finance circles forward guidance. So we don't. He doesn't want to give clues about what the Fed is going to do next. Fine, I can get behind that. But as you say, the contradiction that's embedded in that is that he won't explain why he's not responding to higher inflation today with higher rates. Like we, we definitely have a set of, of circumstances and a set of economic data that a different Fed could choose to raise rates into this.
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B
Yes.
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A
And, and that wouldn't be crazy. It wouldn't be a mad thing to do.
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B
Two theories for why Warsh and the committee, and it's important to bear in mind that this is a committee decision. Why Warsh and the committee didn't raise rates this time. One, they thought a little tough talk and the market will do it for us. Right. You know, we say new sheriff in town and we puff out our chests a little bit and financial conditions tighten. You know, maybe, you know, like you said, you spook bond yields up a little bit, maybe you calm some of the exuberance in the stock market, etc and the market effectively does monetary policy for you. And we saw some of that. Right? We saw some very mild tightening of financial conditions after the Fed's meeting. Second theory is they think this inflation is, wait for it, transitory, in other
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A
words, the T word.
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B
Now they will never use that word. But yeah, some people on the committee, I'm paraphrasing, but some people on the committee think as tariffs fade, energy prices return to normal, et cetera, et cetera, you know, a lot of the inflation will keep coming out of the system. Housing inflation is coming down a little bit too. So the other theory is they're sitting there saying maybe if we just sit here and are very quiet, mean old inflation will go away, you know.
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A
Yeah.
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B
And maybe we're just small beans.
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A
We are small beans. Maybe the inflation will go away. But so for, for listeners who missed this whole thing last time, we should just sort of explain why that T word transitory why is so radioactive in markets. And the reason for that is that when inflation absolutely rocketed after Covid, so the economy all shut down, everything was terrible, the economy all opened up again and suddenly there were all these like supply issues all over the place. You couldn't get your hands on stuff, so the price for stuff went through the roof. Inflation went completely crazy and for a long time big sensible central banks said, ah, don't worry about this everybody, it's just going to be Transitory, like it's just going to pass. Now you can argue about what the word transitory actually means. And in, in the final analysis, I think they were right. It was transitory and it did go away. But the perception certainly from people like Kevin Walsh at the time was, for the love of God, guys, why aren't you raising rates? Inflation has gone crazy. You're too late.
- [11:00]
B
Yeah, and I think for me it was pretty clear that they did raise too late. At some point when inflation starts to be running at 6, 7%, you know, the argument about where it comes from and what inflation really is and how many angels can dance on the head of a pin has to end. And the Fed's job is just to scare everybody a little bit and you know, get, get the, get inflation to simmer down. But there is a perfectly respectable point of view that says we're not at, we're not at 6% now, we're at 3. We've been at 3. It may be, it may be increasing a little bit, but not by much. And these price issues are not generalized self reinforcing inflation endemic to the economy. They're sort of situation specific. So the argument is not totally bonkers. It just has a bad history in the last couple of years.
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A
Yeah. Well, one other thing that I've been chatting to a few bond fund managers about in the past few days is they're really unnerved by this thing that Kevin Walsh is doing, which is saying, you know, there's a bunch of different inflation measures and my favorite one happens to be this one, right, the trimmed mean or whatever. So you can get CPI inflation, but you can also get PCE inflation. You can get core PCE inflation. You can get, you can, you can slice and dice how you measure inflation a million different ways. And we've all sort of settled on, on one. And the Fed's preferred one has always been pce. But he's coming along and saying, well, I actually, I kind of like this one, which trimmed me happens to be the lowest out of the bunch of them. And some bond fund managers are saying this is kind of cheating though, isn't it? Because if you look at the others, it does say that you should be raising rates, which is the last thing Donald Trump wants. So did he say anything about these or did that come up in the middle?
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B
That didn't come up. I think we should unpack what trimmed mean means. I think it's a very important concept in the conversation we're having right now. So, you know, when you measure Inflation, you, like, do this almost impossible job of seeing what all the different prices in the economy are doing. Eggs, gas, paint, houses, rent, whatever. And you take them all and they're all over the place. And you try to figure out from this swarming mass of different prices what the central trend is. And the trimmed mean approach just says, let's cut off the biggest price changes at the top and end of the spectrum because those are just kind of outliers. Let's look past those. And that's related to that thing I said before about the difference between inflation that is kind of endemic to the heart of the economy and is self reinforcing and has to be rooted out, and inflation, that's a couple of weird things happening that will probably stop happening.
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A
Right?
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B
You know what I mean? And the question for the central bank at a time of inflation is always, which of those are you in the coincidental, transitory, incidental kind or the endemic kind? And if you look, and I think what Warsh is inclined to say is you look at Trim Main and you're not in the endemic kind, things are maybe getting a little better. He talked about this at his confirmation hearings. So is that cheating? Kind of. You start throwing out prices because they look like they're moving too much. You don't like this one or you don't. We all do this as analysts. You know, the data comes in that we don't like and we're like, yeah, that, that one, that one doesn't count. That's a tricky road to be on. So I, when I say it's kind of cheating, I really want to emphasize that kind of, it's something we all do as analysts. But you have to be damn careful about which pieces of data you decide to ignore. Right. As an analyst.
- [14:56]
A
But either way, what we've got after this apparent like reignition of the war in Iran is the, that markets think that interest rates are going to rise after all, quite a lot sooner than they previously did. So there's a quarter point rate rise now priced in for the bank of England by the end of the year that had not previously been expected until midway through next year. There's a quarter point rise from the Federal Reserve expected by October, which is a bit earlier than previously expected, and from the European Central bank by September, which again is earlier than previously expected. So, okay, so stock markets are not like completely going nuts at this war being back on, you know, question mark, but they are saying, look, this does have a meaningful impact actually on, on what central banks are going to do next. And we think this is going to be global.
- [15:48]
B
So correct, I should say something about this that makes the Fed's position slightly more comfortable in terms of not having to raise rates. And I wrote about this yesterday, is that the job market is still a bit squishy in the United States. You know, we had written about how the recent job additions numbers last three or four months have been pretty good. And you know, friend of the newsletter James Athey of Marlboro Group wrote in to note. Yeah, but you look at every other job market indicator and they are all saying the job market is pretty stagnant. And he's quite right. The thing about the endemic kind of inflation is that generally happens with a hot jobs market alongside it. And I don't think there's a very good case that the job market is hot. The job market, you might argue that the job market is fine. In fact, that's what I would argue. But it's very hard to argue that it's like tight and hot and kind of inflationary feeling.
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A
Yeah, but all in all I'm going to say a Fed that's trying to say less rather than more, that's trying to be data dependent without being all over the place. When you mix in quite a volatile news event like a war, you definitely have a recipe for some potentially ugly moves in markets. And one thing I would add to that is it is summer. And I know it sounds ridiculous, but in summer people go on holiday, there's a lot less trading that happens, there's a lot less liquidity in markets. And so sometimes you just get like really violent market blow ups for close to no reason at all. And I really would not be surprised to see that happen in the next few days and weeks because again, an unpredictable situation, like a war, an unpredictable Fed and like sort of skimpy, flighty markets equals bad.
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B
I'm going to say I think that could be true. You clearly have an irrational fear of the summer. My, I have an irrational fear of the month of September. I always feel like nobody really wants to have a crisis during the summer until vacation is over. So it's like let's mark our calendars and have the crisis in September when we're all back at work.
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A
Let's remember to freak out in September. Yeah, yeah.
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B
Well, none of this probably bears much scrutiny, you know, if you really studied the history. But you can be scared of August, I'll be scared of September and we'll talk about it in October.
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A
This sounds like a fair deal. Which month are you More scared of listeners. Unhedged.com One next thing to be scared of is Long Short and we're going to be back for that in one sec. Okie doke. 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?
- [18:54]
B
I have to belong. The duck, Katie.
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A
The duck.
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B
The Mighty Duck. And I'm not talking about the sports team the Mighty Ducks. I'm talking about the following brilliant opening par of an FT story. A dispute over the meat used to make Peking duck could ignite a trade war between the EU and China after Brussels on Thursday opened an investigation into dumping of Chinese duck meat at below market prices. Wait till they find out about the sesame noodles. Katie.
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A
Yeah, it's.
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B
Yeah, trade war is on the way and it's all about
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A
diplomatic spat about duck meat.
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B
What do you got for us, Katie?
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A
Well, I long novelty election candidates in. One thing that I'm really enjoying about the fact that Nigel Farage's main, or maybe in fact only opponent in the by election that he has called for Clacton for later this summer is someone by the name of Count Binface. One thing I'm really enjoying about that is that I just know that you, Rob, are sitting over there on the other side of the Atlantic reading this stuff and going, what the hell are the Brits doing?
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B
The guy actually wears this huge bin on his head. I'm worried. Is it really hot in there?
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A
He must be boiling.
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B
Does the bin have like a little fan in the back? I hope. Is he okay?
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A
These are all important questions. He has a policy platform that includes things like cap the cost of croissants at £1 each, and he's had a long standing policy for moving the hairdryer in the men's. The hand dryer, sorry, in the men's toilets of his favourite pub in Uxbridge. So, yeah, I'm mostly just enjoying how like, foreigners are looking on at this and going, I just don't get it. Why is this funny? What is going on here? And how do you translate Count Binface? So the French are apparently calling him Monsieur Tete de Poubelle, which I like. So I'm here for it and I hope it puzzles you, Rob, throughout.
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B
It does, yeah.
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A
Good. Mission accomplished, listeners. We will be back in your ears 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. Special thanks to Laura Clark. 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 unhedged offer I'm Katie Martin. Thanks for listening.