 Hey, hello and welcome to the final episode while the final for peers and I at least still to come next week You've got a mini two parter where Stephen is counting down the top ten Episode one ten to six an episode two five to one of the biggest banking themes of the year I've already recorded those. They're pretty cool if I don't mind saying so myself You definitely need to give those a listen, but one thing that you'll enjoy peers when you listen to that episode is you you get a shout out Actually the SVB episode Appears to be everyone's favorite unanimous decision that by the board. Okay Done. I'll take that It's it's a long time ago that might if I'm still Basking in the glory of something that happened nine months ago Yeah, what have you been doing for the last exactly one might ask But let's keep it on point for this episode because this particular week It's going to be bookended for the year really with the major central bank decisions just within the last 24 hours We've had the US Federal Reserve the UK's Bank of England and the European Central Bank All of which have left interest rates on hold that was very much as widely expected by the market However Hey, there's been a huge reaction in markets, but it hasn't been on all three of them predominantly It's on one and then also there's a little bit of divergence between the three as well So perhaps we can start from the top and talk about the big one and the first one Which was the US Federal Reserve. So what happened there and why have bonds and yields? Bonds soaring into your hand here. Yeah, it's a good one with these fair denouncements. I should say Yeah, indeed With these fed an ices because actually on the face of it. What did they do? Well, actually they did nothing because interest rates Remain unchanged So the interest rate in the US is 5.5 percent and it has been thus since the summer And it continues to be 5.5 percent so actually technically have any Monetary policy conditions changed the answer is no however, the markets ripped and Smashed up. Well, we'll talk about some nuances generally speaking markets ripped There's a pop few pockets of interest where you've seen some some downside movement But yeah, generally markets went through the roof and and why and so it's more about the language that they use That's the Federal Reserve now to talk about what they're going to do in the future. They're more specifically What are they going to do in 2024 with interest rates? And that's that's ultimately the biggest force on markets today what's going to happen to interest rates in the next 12 months and What makes and that's generally speaking always the case right markets are looking maybe let's just call it Six months ahead. That's where their play pricing is based on what we think is coming in in the next sort of six months Now that's normally the state of play what we've got here is like a double whammy you add on an extra bit of spice because not only Are we looking out of the six months? Well, what's going to happen in the next six months is that we're going to get a turn in direction of the monetary policy cycle, so we're right at the pinnacle of the upward trajectory of interest rates that trajectory has been going up for like 18 Months more actually 20 well, let's just call it 21 months. We've been going up and now we're at the top and the key is now We're going to go back down. So what we have here. We're right in this This kind of limbo period between the interest rate hiking cycle and the interest rate cutting cycle And this is always and then the same can be said for the bottom right when you when you've when you've gone through the cutting cycle And right when's the hiking cycle going to start whenever you're at the top or the bottom of the cycle markets become hypersensitive To then the timing of when will when will the change in direction actually occur? So that's where we are at the moment. And so what happened last night? Well the Fed I mean No, I've been I've been watching central bankers talk for 20 years and What last night? Well, I'd say was one of the most clear Decisive communications. I think I've ever seen in a really surprising way because markets have been on the up for the last Cup last November was awesome, right? For stocks that went through the roof bond prices went through the roof as well as bond yields dropped and The thought going into the meeting was well, hang on a minute The Fed aren't gonna like the fact that stock markets have gone through the roof here They've gone through the roof on the expectation that we're going to get rate cuts next year And the general thought was well, the Fed aren't gonna like this The markets have got carried away with themselves yet again You know being over optimistic about what the monetary conditions might be and the thought was the Fed was step up last night and Slap these markets back down and the power go Don't don't get carried away Rates are gonna stay higher for longer. This inflation Genie is not back in the bottle yet. Calm yourselves down. That's what we thought was gonna happen except He came out and basically said guys Here's the punch bowl. You've been drinking out of the punch bowl for the last month The stocks are going up and he's just doused in another bottle of vodka and he said let's go. Let's party He basically I guess he's flipped from being Yeah, rather than being rates are gonna stay high for longer he's basically saying we're now gonna start cutting and Yeah, rather than higher for longer. It's now higher for shorter That's the best way of describing it and so yeah Yeah, what I've just tussled within my head there is whether compliance will sign off that tagline there Which I'm definitely gonna use for this episode. He's come in and doused another bottle of vodka in the punch bowl I'm not sure that one will pass but no good analogy at least and Okay, so that that explains the Fed so given that the Fed are in charge of the world's Most important economy Would you have normally have thought then that someone like the Bank of England the ECB would be forced to follow or Their economic conditions dictate then a different course of action. So what's the difference here? I mean what's happened? Yeah, so the economic conditions are slightly different though These these economies they're not in lockstep perfect sync and in fact covid's really kind of shunted Economies out of sync in in many ways and so they're not perfectly in sync so You shouldn't expect The communication from these central banks to be exactly the same And that's really what's happened. So today Thursday the 14th We've had the Bank of England and the ECB with their meetings and their press conferences and they've been more hawkish So definitely they're not stepping out and going guys. We're cutting rates next year. You're absolutely right That's what Jay Powell said last night And the Bank of England are more like higher for longer, you know, they're basically saying what Powell was saying six months ago You know higher for longer inflation. We haven't tackled this inflation crisis Isn't over, you know all that kind of language That's what the Bank of England is still saying and the and the reason for that. I Mean, you just look at the set of numbers that really matter and that is inflation So when it comes to interest rates, it's inflation That's that's what is driving interest rate decisions at the moment and if you look across the three territories Well in the US the headline CPI rate is 3.1 percent The core CPI rate, which is perhaps more important is at 4% Okay And these numbers have been dropping and dropping and dropping hence why we're starting to hear them talk about rate cuts If you compare that to the UK So the headline CPI rate in the UK is 4.6 percent. That's compared to the US 3.1 So I'm decent amount higher core Well core it's 5.7 percent still in the UK versus the US 4 percent So that inflations it's come down slower in the UK And it hasn't come down far enough yet for the Bank of England to be ready to do a J-PAL and Just douse the punch ball with some more booze. So what they're gonna wait That's that's one thing to say. All right, where I've got some beef with the Bank of England is So they've got nine People on their voting committee, right? And so each meeting they Between the everyone gets one vote and then the majority rules. Okay now last sorry at lunchtime today The vote split was six three basically what happened was of these nine people six voted to keep interest rates unchanged You still got three members of the Bank of England who are voting for hikes not cuts So here you've got a real divergence between the Fed and the Bank of England There's everyone on the Fed is going right. We're ready to start cutting rates in the new year Whereas in the Bank of England, you still got three out of the nine Going actually we should be hiking. So but what I my point around where my beef is here is ultimately Generally speaking The US economy does its thing and then everyone else follows because it's such a dominant force on the planet, right? And so To expect the UK to head off in a sudden massive opposite direction economically to the US It's just not gonna happen. We're too synced even though the sink is a little bit out of step ultimately We are synced and so what happens in the US generally is gonna happen here So I think the Bank of England should be They should be voting 9-0 to keep rates on whole there shouldn't be anybody still voting to hike in my opinion, but So from an economic perspective in the UK so earlier this week The UK economy think it was October data because backward-looking contracted point three percent Issue is falling. She'll see goes against the grain of the three who are looking to hike my question is are we in the sweet spot for global equities right now because Yes, growth has been very robust in the US, but as we're going to see going forward. It's likely to weaken Going forward. So growth potential is going to get worse as downside risks there. So at the moment stocks are kind of Um steroid induced by this idea of rates are going to come down, but as the economy actually starts to slow What does then that look like as we go further into next year? Yeah, so So comparing the two again the US versus the UK the US economy is really strong Like they've got like if you're if you're a stock, right a share price in the US is that's the sweet spot We talked about Goldilocks, right? You've actually got a strong economy positive and you got the Fed are going to cut rates positive in the UK it's kind of The exact opposite where you've got an economy that's weak now and actually contracted as you said in October and The Bank of England are still Threatening to hike right so you kind of got the double negative now There are slight nuances as to why the Bank of England are being a bit more stubborn I said inflation's high the thing is here in the UK Yes, the economy is weaker, but Inflation still high and the thing is we still got services price inflation that's very elevated and the wage growth numbers Are still very elevated and you've had stuff like the government raising the minimum wage And things like this which feeds into wage growth now The thing about that is especially at the bottom end of the spectrum in terms of income levels If you're getting wage growth at the very bottom end that tends to be more inflationary That's because people earning lower income end of the bracket. They're tending to spend all of their income on Domestically, okay top end of the wage bracket the super rich. They're not spending all their income because There's too much of it to spend right and they're investing it in stocks and other assets plus they typically travel more So you're getting more spending internationally as well So from an inflationary point of view where the UK is a little bit different to the US the wage growth is still Elevated and at the lower income level. That's what the Bank of England adjust They're kind of just looking over their shoulder a bit going hang on That that kind of beast is still in view and whilst that's still lingering. They don't want to start celebrating That the inflation crisis is over what which is fair enough, I guess, okay, so This seems to be quite a clear contrast between what you've discussed the US and the UK So where does Europe fit within that spectrum? Europe's kind of well So let me compare them again. So I was going through this inflation numbers, right? Well, well actually also let's look at the the actual What's the level of interest rates because actually the Fed have got the highest interest rate at the moment? 5.5% but they've signaled they're going to start to cut the Bank of England are slightly below at 5.25% basically saying they're at the top But they're not ready to cut actually the ECB is lower still at 4.5 So the ECB's hiking cycle was smaller number one Interestingly, I have the whole three inflation levels in the eurozone are the lowest So the headline CPI is 2.4 percent below the US 3.1 below the UK 4.6 and Their core CPI is 3.6 percent below the US is 4 percent below the UK's 5.7 So they've got the lowest interest rates. They've got the lowest inflation rates, but The ECB are notoriously Slow, they're not proactive You know, it's due to the fact you've got, you know, ultimately 19 countries around the table all putting in their own thing And they're all very different economies. That's just a lot harder to get stuff done So Lagarde Christine Lagarde the president of the ECB was basically saying they did not discuss the idea of cutting interest rates at all in the meeting and She was basically saying, you know cutting rates actually she made quite a good analogy Cutting rates too soon after the most aggressive series of rate rises in the ECB's history Would be like passing From solid to gas Without going through the liquid phase As you were just when you said solid where you said it and then gas Yeah, I certainly wasn't thinking of probably what she was intending So there's your a little bit of a GCSE physics Lesson for you in the ECB meeting this afternoon But yes, they're not they're closer to the Bank of England in the respect of They're waiting and they're being a bit more prudent and conservative, which is always their way Even though their inflation levels are lower than anyone else's and you could argue economically They're in worse shape But the good old ECB Sit there and do nothing. So yeah, I'm not surprised Okay final question then you said at the top of the show that there are some pockets that haven't reacted so favorably So what would those pockets be? Yeah, right? So this is life. I just list out some of the market moves. Let's just go back to the big boys now and talk about the Fed I Talk about some of the the market reactions on Wednesday night when power was super dovish saying right we're cutting rates Let's go. Let's go. Now. I talked with a couple of weeks ago about how This is phenomenal news For companies that you would put in the category of being interest rates sensitive So companies where when borrowing costs are high, that's really bad news for them And that's tends to be growth stocks who are more highly levered I'm borrowing more to invest in their growth because they've got loads more growth to go So let's accelerate that by borrowing money So that whole growth stock heart tends to be and that that's the section of the market There's been batted down and particularly in the smaller companies as well So the small cap so there's an index called the Russell 2000 in the US Which is that an index of 2000 small cap US stocks. So that was up three and a half percent on Wednesday night So that's your small Interest rate sensitive stocks really powering north. Okay, you've got bond yields. Well, they're dropping Certainly at the show what we call the shorter end of the curve I don't want to go too technical here, but like a two-year government bond the yields were down 30 basis points 0.3 percent, which is a big move and then It's not just us stocks, right that are feeding off of this and here's a really good point to make We just talked about the Bank of England and the ECB not doing the same as power. They're not saying we're going to cut and yet European and UK stocks are up Why because it's the US that's more important So actually and check this out The DAX that's the German stock market hit a new all-time high on Wednesday night DAX futures and again this morning new all-time high Not because the ECB are saying they're cutting rates because they didn't it's because the Fed are saying they're cutting rates You had the footsie up 1.6 percent European stocks through the roof the dollar index dropped sharply. You've got gold prices higher Again all-time highs so lots of movement all over the place But the most interesting I think and actually it's something Stephen mentioned for our regular listeners. He coined quite a good Terminal I hadn't heard it. I don't know if he he came up with it himself or he read it somewhere But he talked about it's not the S&P 500 It's the S&P 7 And then it's the remaining S&P 493 So the the S&P 7 meaning the magnificent 7 the big 7 tech stocks in the US. So what happened this week on Wednesday was Something happened that has not happened for for the entire year and that is the S&P was up on the day With all seven of the magnificent seven being down on the day That was the only single day of the entire year where that's happened and actually that's only happened on five days in the last five years Such as the dominance of these seven stocks normally if these seven stocks are up the index is up if the seven stocks are down The index is down on Wednesday The seven stocks were down and the index was up and what's happening is money is flowing out of those Magnificent seven who are not interest rate sensitive even though they're tech stocks You could say and there's still plenty of growth for some of them. They're such cash flow So cash flow generative they don't borrow money, right? So they're not they're not they're immune to the interest rate Hikes so they've done really well this year as rates have been going up So now rates have been signalling to go down. You're getting people book profit on the magnificent seven Push this money down into the lower cap stocks So yeah Magnificent seven down whilst the index was up first time in the whole year But just to be clear You're not writing off the magnificent seven for 2024. No, so just to be clear There's a bit of a rotation of what we call a rotation of assets here, right? Where you're getting some players that have been running these strategies all year long the seven and Not invested in the others or maybe you got some going short the others if they got more extreme strategy All you've got is a little bit of a strategy shift Where you're taking some of the money off the table from the seven to pivot elsewhere, but this means the seven dip Have you heard of the terminology by the dip? Well, yeah, so those who aren't in the magnificent seven or who aren't invested enough in their opinion This is their chance to come in on those stocks. So yeah For sure, I'm not calling the top on the magnificent seven Just to specify this podcast is not sponsored by it aro or IG When we start talking by the dips Okay, well, let's let's wrap it up there final episode of the year. So yeah, just thank you from myself and Piers I'm sure for that for following us throughout the year and do drop us a comment I know you can do that on Spotify in particular. It's really easy to do. Let us know what your favorite episode was Hmm. So drop a comment Let us know and that will give us a little bit of direction and guidance then perhaps of how we can steer the content for 2024 be really appreciated, but thank you as ever this being the partner on the on the pod Thank you another another year in the bank and Yeah, look forward to seeing you on the other side. Have a great festive holiday All right, take care everyone All the best. Bye. Bye