 Okay, hello and welcome to episode 95 of the market maker podcast and it's been a heavy central bank week really the final big week in the run up to Christmas and New Year we had the Fed the Bank of England and the ECB all deliver their interest rate announcements and that's going to be the main theme we're going to talk about on the back of that. Of course, there was also important information in regards to inflation, which is the key metric that the central banks are watching. We had UK and US CPI so also touch on that but before we begin, I do have peers with me back on the show. Hello. And we had our Christmas party. The amplified Christmas party was yesterday. And when we left one location to move to the next. We just so happened to be walking behind a certain individual on a very meaningful day. All things being considered so peers perhaps you could reveal who this individual was. Yeah, it's quite, it's kind of a function of our sort of, I guess job career that we kind of got a little bit sort of. We got quite excited, didn't we? Well, basically it's a celeb, like pretty much a celebrity spot for us like right in front of us. You were excited I was scared because you normally bad mouth this guy on this. I was a little bit nervous because he's actually quite a bit bigger than I thought it's quite stocky isn't he's quite stocky and he's tall and stocky which is a deadly combo. Yeah. But yeah, no it was it was none other than Andrew Bailey Bank of England governor just fresh out of the Bank of England where he had just spent the afternoon. Well, I guess spent the morning, and then midday decided to hike interest rates so yeah and there he was just trotting on down the road with his bag I guess just heading I don't know I reckon he was just heading to London Bridge. I had a quick look. I assume he was actually I've not managed to pin down his exact location but apparently he lives in South London. But given the fact that I also had a look, because we said at the time, like surely he lives nearby because he is, you know, banking half a mill salary as the BOE governor. Yeah, so his salary is actually half a mill. But he gets an extra 75 K top up for his pension. Every year on the back of that. I reckon he's probably a dullage village kind of guy. Yeah. But I put those a bit. Well I was a bit disappointed. I mean obviously I was quite, quite excited when we were just literally walking right behind him but then I don't know. Jerome, he's not going to be just hitting the street as a normal commuter is the Jerome pal will be limo. Limo taxi service luxury taxi service I reckon you won't find him walking to the tube. Yeah. And there was something a little bit, a little bit sinister about his demeanor is he was walking in a very like odd kind of slightly looming dooming kind of way. Yeah. He's a man who's like entrenched. Yeah, in a in a in a view and a purpose. Yeah, because everyone around him because bearing in mind this is a city the city on a Thursday night, peak Christmas season. So he's probably quite scared for his safety. I'm just surprised he was just kind of one of the people. Yeah. Yeah. Well, you know, Andrew if you're listening good to see yesterday. Well, let's, on that, let's kick off with the decision that he presided over which was the Bank of England they did hike interest rates by 0.5%, which is very much as expected it takes interest rates in the UK now to their highest in 14 years at 3.5%. The account was a three way split. There was a little bit of speculation circulating earlier in the week about a potential four way of which if that were to occur would have been the first time since 97 or something like that. I guess there might be a question. You know what you're thinking is what is a three way. Let me just clarify exactly three way is we're talking about monetary policy here. Ah, okay. Right. Still with me. So what this is is there's nine monetary policy committee members and a three way split basically is a division of how they voted the majority hiked or wanted to hike 50 basis points which is what materialized to wanted no change while one wanted to go three quarters of 1% rather than half So you can see there, the kind of absolute opposites of opinion, going from let's just leave rates, we've hiked. I think this was the ninth consecutive meeting we've done nine, nine of these now, let's stop. And I'm sure we're going to talk about that because I know you've kind of fallen camp or someone else going look let's just hike another 0.75% so just before I hand over to your thoughts. Ken Ray Rowe and Dingra, they backed leaving rates unchanged. Their reasons were they cited a weak economy, signs that the existing rate rises were already starting to affect the jobs market, and the full effect of those nine is still to come through. Right. And obviously this week, which we can also look at UK CPI fell. So your thoughts on the actual. Well, it's not it wasn't a surprise. So, you know, another hike, but albeit a smaller one at 0.5% was what markets were expecting. So that's what happened, but yeah I'm definitely still in the camp where I think it's an error. There he was walking along the street last night. And yeah, I just think he's got it wrong. My personal humble opinion, I think that the, especially in the UK, more so than the Fed in the US and more so probably than the ECB in Europe as well but I think because the UK economy and the economic outlook for the UK is worse than it is. And if it's worse for the other regions, then I think it's even more reason to put the brakes on now. You know, interest rates going up. It does take time to kind of follow through and have the impact, you know, on the actual, you know, on the street as it were in terms of having an impact on borrowing costs and so on. And all of these hikes they've been pumping through, you could argue that actually none of them yet have really had a full on proper impact it takes such six to nine months of a kind of lag from the interest rate to change. And for them that to have be fully felt in the underlying economy. Okay, six to nine months so here we are. And like we're heading into 2023 and look, we're going to have a big recession. They're hiking too much now. And I think this will come through to be very apparent next year. And look, they're going to have to cut again but I think any height from here is a mistake so I think yesterday was a mistake but what do I know I mean what Bailey said was a further full forceful monetary policy response was required. And you know who knows maybe more to come. So, yeah, I don't know. And I just I just feel like they've overdone it now. And have we, have we seen peak inflation already because inflation was at 11.1% the reading we had this week it dropped to 10.7 which was actually expectations. The inflation decline largely due to a cost of petrol and used cars along with tobacco clothing computer games and hotel stays for all the reasons but still impacting the cost of living crisis was that food prices are still going up. Yeah, they've risen by around just shy of 17% in the last 12 months. Yeah. Yeah, I mean, so 10.7% right that was the headline inflation reading year on year for November. So slightly less than October's high of 11.1, but still that 10.7% reading it's still the second highest reading in this entire episode right so it's really elevated obviously above 10% is just kind of crazy insane but just look at you know core inflation. It's not going up. I mean look, don't get me wrong. It's not really yet showing signs going down either. But if you look at the core inflation charts very it's much flatter. And actually we had a reading for November at 6.3%. Now the April inflation reading was 6.2. We had like eight months where it's kind of been flat it's been oscillating up and down a bit but basically flat for eight months so it's not like inflation's going up and look I guess you could say well it's not coming back down yet. So we need to carry on hiking rates because obviously these rate hikes are doing the job but that's the error. That's failing to realise that there's a lag between rates going up and having the actual impact. Another supporting factor perhaps for you and Silvana and Swati, the two ladies you voted for holding, because I know you're a trio, is that UK retail sales came out this morning and it unexpectedly fell in November came in at month and month minus 0.4%. The consensus estimate was for plus 0.3%. And the reason why I think this is a supportive what you're saying is because consumer spending. As you said many times over many episodes accounts for about two thirds of national output is key for growth. Now the decline last month was driven by online sales with Black Friday on November 25th helping less prior years. Sales of auto fuel, second hand goods at auction houses, computer goods were also the other key things for the decline. One thing though. So, despite being partly offset by higher sales of food and drink, clothing, household goods, shoppers generally attracted to some of the early and it was going to be long department store kind of discounting to counteract the kind of economic situation. One of the other things is, is that we've had horrible weather here in the UK and train strikes. Yeah, now actually then if things are already bad and Black Friday has underperformed. Yeah, doesn't matter if you've got discounts in terms of footfall, you can't actually get out there. And one of the things here is the hospitality businesses. Because, I mean I've seen lots of shots and things like that seen a bit. I mean, last night. I mean, peak Christmas season it wasn't that busy. It wasn't to be honest. It wasn't. Yeah, I agree. Like, yeah, we went to that bar after obviously bumping into Andy, good old Andrew Bailey we went into that bar and yeah it was. It wasn't round. I mean it was quite busy, but it wasn't round, but previous years you wouldn't have to get it like full stop. It'd be a queue right so. Yeah, look at retail sales. If you want to look at, if you want to look at a chart that tells you that quite starkly and quite dramatically tells you how bad the UK situation is, then look at a retail sales year on year chart. And it has been heavily negative every month or since April. And I mean heavily averaging about minus 6% down year on year every month since April. And that's going to continue. And, you know, this inflation thing it's hurting obviously, and we're about to tip into a pretty decent size recession. And there is one, there's one thing, and actually maybe actually I'll bring it up when we talk about the Fed, because it's perhaps a more insightful that it's the labor market there's just one little thing in this whole equation that's still being quite stubborn. And it's the kind of powlers kind of hung his hat on it as the reason to stay hawkish I'll talk about that when we. Let's go I mean look the limos arrived, Jay Powell's just rocked up so the Fed helps the height rates themselves by their own point 5%. But one of the key comments was from the Fed chair drone power that we still have some ways to go this referencing, and this will will come back to and link to the ECB of what Lagarde said as well it's very similar. But along with the increase came an indication that officials expect to keep rates higher through next year with no reductions until 2024 the terminal rate. So to simplify that they're just talking about where rates are going to peak in the cycle. Which where officials expect to end rate hikes was put at 5.1%, according to the dot plot, which is the expectations of these these policy officials. There were hawkish comments then, but it did come in the context of headline year over year reading inflation in the US earlier in the week, this was the day before the Fed announcement came in at 7.1%. There's below expectations at 7.3 actually marked the smallest 12 months increase since the period ending December of 2021. So before reading was also 0.1 below expectations came in. Well, it came in at is below expectations of 6%. So 5.9 in fact shelter costs, which are the biggest service component. And they make up about a third of the overall CPI index increased by 0.6% last month, and that's up 0.6 but actually, that's the smallest advance in four months as hotel rates declined so. Yeah, did you think, did you think it was quite hawkish what pal was saying. Yeah, I think it was more hawkish than expected. Yeah, so this if you want to take the full week on Tuesday we had the inflation data. Yeah, right, and that was kind of positive right in that it was dropped as you're saying, further than expected so you had a bit of a well markets were really interesting because markets kind of rallied pretty hard. I like stock markets rallied pretty hard off the back of that, but then it did then it didn't last it was quite a sharp rally and then by the close it all come back off and we kind of closed around about quite flat so markets had to go at that move saying inflation is dropping faster than we thought. Therefore, the Fed are going to the top, the peak of the feds hiking cycle will be lower. You know we will maybe start to see even rate cuts second half of next year. This is what's been fueling that market rally over the last few weeks right, the idea that inflation is going to drop faster than the Fed have been thinking before they'll stop hiking rates sooner, that peak will be lower, and we'll have a recession and they'll start cutting rates second half next year that that was kind of the idea right so stocks on the up but the rally didn't last which was quite telling. Then you move on to the following day where it's the Fed, and yeah I think he was more hawkish than expected like one thing he said was, it will take substantially more evidence to give confidence that inflation is on a sustained downward path. So he still needs substantially more evidence now. I don't know why. I mean the headline inflation number. Well, here we go one, two, three, four, it's been going down five months in a row with actually the drop in November being the largest one. So it's actually been going down for five months and the downward trajectory is just accelerated. That's on the headline reading. Look at the core and find it's a bit different but you still have now two down months in a row. The move lower being much larger than expected. Sure, I think when you look at the core chart, the core inflation print for November was 6%. You need something below 5.9, which was the two readings we had in the summer so June, July we had 5.9. So I think you kind of need something below 5.9 to go right actually if you really wanted. So maybe Powell's waiting for that core inflation chart to go below 5.9. So maybe that's his idea so he but because it hasn't. You know, he's remained kind of hawkish and I guess the dot plot was that interesting kind of that was the hawkish element right because that's where they fed members predict and tell us what their view is on where interest rates are going to be in the future. If you take the end of 2023 dots, then it moved up right and it's gone up to 5.1%. So remember that the current interest rate is now four and a half percent right. So they're saying 5.1 so that means number one. They're not at the top of the hiking cycle there are more hikes to come. That's number one. They're also saying number two there and this is the important bit there aren't going to be any cuts at all in 2023. No cuts at all. Remember markets have been rallying a bit in the last few weeks because they're starting to think that cuts will be second half of the year, no cuts at all. And to give you an idea how quickly it's changed. So the number of fed members who think interest rates will be 5.1% or higher at the end of next year is 17 out of the 19 members right 17 of the 19 think it will be 5.1 or more. If you go to the September meeting. None of them thought rates would be above 5%, not one. So in the last three months, 17 of the 19 have revised up there. Kind of prediction as to where rates will peak. And they're telling us there'll be no cuts next year. Now that's what the Fed is saying. What's so compelling to have such a majority of them holding that view then. Well, so how's angle on inflation, whilst when you look at all the headlines and the charts find they're coming down is one big concern is about the labor market. And what we have is a gap. I think it's like a three and a half million job gap. Right. So in terms of number of jobs available and number of workers. There's a three and a half million gap. So that means that the labor market conditions are still really tight. And the Fed all the different federal districts because we talk about the Federal Reserve but there are, think why they're 12 federal districts so the US the whole of the US is broken up into 12 areas. The Fed has a federal district bank and they do analysis on their own area right economic analysis and this is released monthly and it's called it's called the beige book. Because it's literally a book. Well, I guess it used to be a report that would be given to the Fed in a beige binder but it's like an economic review of each region. Now what that region was the base book was talking about was how companies. Going into a recession companies will normally lay people are cut costs. And obviously that just spirals the recession, because people are losing their jobs, they don't have income anymore. Therefore they can't consume so consumption drops and this kind of that like that vicious cycle. What we're seeing here is a bit weird for now, whilst we are getting job cuts and we've been talking about this in the tech sector if you look a bit more broadly. We are hesitant to lay people off, because they found it a real nightmare to hire. You just can't hire at the moment, because of that gap that's three and a half million people gap right. So they're like, Oh, God, if I, if I do lay people off, I'm going to want to rehire when we're kind of the other side of the recession but rehiring has been so difficult, maybe I should hang on to these stuff. I think that's going to be more negative for our bottom line as a company, maybe we should just try and hang on to them so we don't have that rehiring nightmare on the other side. So that means that the Fed believe because of that tightness in the labor market they feel that wages are going to stay high. They feel there won't be that demand destruction that you might normally expect in the recession when people get laid off. I'm worried that that will continue to sustain this high inflation that that's their thing. So, I guess they have a point. And so I guess the Fed want needs to keep rates higher for longer to create more pain so that companies do lay them off because they have to they literally can't afford them. And then fine you get the demand destruction and fine inflation comes down. Yeah, so, but the markets right. That's what the Fed are saying. And that's one thing. Markets aren't so sure they're not quite sure whether to believe them. And I think you've kind of seen that this week, although I'd say, because markets kind of rallied Tuesday afternoon of the inflation data then dropped back off and close pretty much flat. And off the Fed meeting itself, which was Wednesday night, of course, we got some downside. No, hang on, sorry, it was quite choppy. And yeah, right markets finish slightly not right but not much and actually pretty much where we were pre inflation data on Tuesday. So markets were about flat going through the inflation data and the Fed is not until Thursday started seeing things come off and actually Thursday was a really big down day. So I think maybe the markets are just slowly digesting that Fed news a bit more and actually taking it a bit more on board because pre this week markets have not been agreeing with the Fed they don't believe the Fed. Markets have been going Fed you're wrong inflation is going to come down faster than you think you're not going to get rates above 5% you're going to you're going to cave and start cutting second half of next year. That's what markets been thinking so I think I think there's just a bit more doubt in amongst markets now. And maybe they think you know God maybe the Fed have got a point and that's why you saw the downside yesterday. So that's a bit of the, or exacerbating the weight that's come in to the back end of this week. Essentially across all global indices is we had the ECB. Yeah, and the ECB hiked the similar recurring theme of 50 but the guard, the president of the ECB said anybody who thinks that this is a pivot for the ECB is wrong. We should expect rates interest rates at 50 basis point pace for a period of time. Yeah, and European stocks fell about 3% yesterday as the lowest level in a month, nearly the most in two months actually. Yeah, I think of the three. So we've had the three banks right. The Fed went first bank of England and the ECB of the three ECB have been more hawkish with their, they all did the same thing they hiked rates by 50 basis points but the ECB were more hawkish more ground to cover, we have longer to go, the ECB is not pivoting. Yeah, probably, you know, for the 50 basis point hikes, you know for a period of time to understand that the ECB are behind the other two in their hiking cycle. Right, and they always are minutes. It's classic ECB to be just late to the party. You know, so they're interested, they didn't start hiking rates until June. Right, the bank of England started in December. The Fed started in March. So these be starting June so they're behind. And their interest rates are at two and a half percent. So, you know, the Fed's interest rates at four and a half. And the bank of England is at three and a half. So they're they're behind. So from that argument, well, they should be hiking for longer than the other two because they started later. But, yeah, I think the Lagarde's comments really tipped the balance this week. That's why you got the big sell off yesterday in global markets. I mean, Europe sold off more than the others. I mean, Europe, Europe's stock 600 had their worst down days since May, because it was notably hawkish from global markets all came up as a result. So, yeah. So the other the other factor here as well, probably compounded that was that complimenting the right push officials outlined plans for quantitative tightening. Right. Offload that's basically offloading government debt that they had purchased as a stimulus in the past through to cover the plan envisages partially halting reinvestments of maturing bonds under their APP, the asset purchase program from March. So the end of Q one volumes are going to average 15 billion euros a month in the second quarter with the pace beyond that still yet to be determined so they're just plowing ahead. Come what may. Yeah, and again, their last to do. You know the Fed have been reducing the balance sheet Bank of England have as well. All right. There was the, you know, Liz trust saga that kind of just got in the way and had a little Yeah, we don't talk about that. Okay. So, yeah, I mean, they're always late. The problem with the ECB is, by the time they really get their act together, right, let's go, let's go, let's start tightening then there was two legs the recession started so. Yeah. So, certainly the hawkishness of the ECB with they were the most hawkish of the three. That's why you got set up on Thursday. So I think look the big question now is well, we've got a couple of weeks till your end. And what happens, you know, with markets, because we were rallying it was looking pretty nice we were, we were talking about the Santa rally and you know, the scope for a push into your end and it's all of a sudden this week it's suddenly just gone a bit flat. And is that rally into year and actually actually going to happen and in fact the S&P right now in the futures we're trading the lowest we've traded for a month. We're down to low as we haven't seen since the start of November now that upward cycle that we've had from mid October, where for now it looks like it peaked into November, just around 4100 on the S&P so that six week rally. Looking more on the longer term chart, where that six week rally has peaked, it's pretty much right on the downward trend line for the last 12 months. So technically, the index has turned at the trend line and has now been going down for a couple of well for a for a while this week and then set the lowest levels we've seen for like four or five weeks right so technically it all looks like neat and tidy, the downtrends still in play, and maybe we go lower. I mean, thinking about valuations. Well yeah valuations have obviously come down because the market sold off all year right, thinking about S&P P e ratios. At the peak it got a bit crazy in 2021 where the average was up around 25, 26 times P ratio which is crazy, crazy high right. We've come off we're about 17. So the S&P is trading at 17 times P. Now that in itself is about mid level is about average. Meaning we're not stock prices are not pricing in a recession right now. They are not pricing in a recession. If they were we'd need P ratios to be going down towards 10 right 1012 area so you might say from a if you think there's going to be a recession. You do need to go lower to price that in but maybe you don't I mean, yeah, I was quite confident we get a rally into your end. I thought maybe get 4200 in the S&P. Now I think that's definitely less confident about that. But do we go to 3600. I don't know. I don't think so. Personally I don't think so. I think we will slide sideways into year end. That six week rally is kind of done, but I don't expect a big sell off unless stuff happens and material like you know you like looking at the headlines today like in the FT obviously we've got looks like COVID cases in Beijing are on the up so whether I've seen them plays a role I saw Russia are selling oil to India. At, you know, the European price cap, or I should say the West sanctioned price cap so looks like Putin's caved. And it's going on alright fine, I have to use these ships that are only going to get insured by the European insurers, I can only use them if I'm selling oil below the cap of $60 and it looks like that's happening so from an inflationary point of view it's a good thing from an oil supply risk point of view. So that's a positive. But that maybe that reverses again I don't know. So, yeah, I don't think there's we kind of we've had the last major kind of macro stuff now this week was this was the big week of the, you know, the last big remaining week of the year. The CPI prints and the central banks all coming and the net sort of conclusion is, inflation was looking good, it's dropped more than we thought, but the central banks have stayed more hawkish than we were expecting. So net next kind of that's annoying, and markets might just flatten off into the end of the year. Right well on that conclusion. This will be the last episode until we're back in the new year, I think it will be probably the sixth I think by the time we get around to the, the welcome back to 2023. What episode are we on here. We're on 95. 95. Yeah. Okay, so we need to we're going to drop some plans for the big 100. Well, we need to start. Yeah, well look, there's going to be not just the 100 lots more to come from amplify we've been having lots of strategy meetings. The team and I over the last couple of days about lots of exciting new simulations that we're going to be coming to market with so for sure stay tuned if you're not subscribed to the channel please do hit the notification bell as well and you're getting to know as soon as the new episode comes out in the new year. Stay safe, stay warm. Enjoy your Christmas. Have a great new year. Piers thank you for the last 12 months joining me on here. Yeah. Well, happy new year Merry Christmas and you have a great break. All right, take care everyone.