Fears Grow of Extended Conflict in Iran; Oil Halts Advance

**SPEAKER_1** (0:02)
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**Paul Sweeney** (0:27)
Yields ticking higher and that is one of the challenges for this market in a world with global interest rates higher. It's not just the US folks, it's around the world. What does that mean for global stocks? Well, one of the folks we can chat with is Sebastien Page. He's co-head of Global Investments and CIO. This little shop down in Baltimore called T Rowe Price, one of my all-time favorite spots. Some really smart people down there over the years I've worked with. Sebastien, what are the conversations you're having with global investors here or saying, hey, rates higher for longer, what does that mean for various asset classes out there? How do you think about that?

**Sebastien Page** (1:04)
Paul, thank you. And first of all, I'm dreaming of the day where you'll refer to T Rowe Price as a big shop. We're at 1.9 trillion.
We're working on getting to big. Paul, look, everyone's talking about...

**Paul Sweeney** (1:17)
T Rowe is like my biggest and best client for like 30 years. That's how good they are, folks.

**Sebastien Page** (1:24)
I know. Thank you, Paul.
Look, everybody's talking about rates and long rates. And the main question is, why are long rates rising? You could say maybe because of growth and productivity. You could say maybe because of inflation. You could say maybe because rates are rising in other countries. You could say, well, it's this wonky term, the term premium, and we don't really know how it's measured, but maybe it's that. Or you could say it's the deficit.
The prevailing narrative, Paul, is that it's probably the deficits. But I've been looking into this, how the 10-year is trading relative to oil prices. I calculated the rolling 30-day correlation between changes in the 10-year and changes in oil prices. And I went back 40 years. And guess what? It's at 80 percent, plus 80 percent correlation between oil and the 10-year yield. And that is the 99th percentile, basically as high as it's been over that 40-year period. Right now, the 10-year is actually quite responsive to oil prices. So I would not underestimate the inflation impact. And also the fact that market participants might be thinking, well, if the war continues, that means more deficits as well. So these things are all related. But my message is to not underestimate the oil price as an inflation component of rising long rates.

**Tom Keene** (2:51)
Okay. Are markets overdoing though the idea of rate hikes? I mean, looking at Bloomberg's chief US economist, Anna Wong, I'll take her word for it. Yes, that's good. That August will see tepid jobs growth. This month usually surprises to the downside. So we've got the marquee report on Friday, the non-farm payrolls number and then the CPI out next week. So are we overdoing it?

**Sebastien Page** (3:18)
Potentially, our US economist Blarina Ierucci, she's often on Bloomberg, as you know.
She has the probability of a hike following Jackson Hole at about 50 percent, and the market is pricing maybe a hike of 70 percent. So the bigger question is, is this going to move markets, whether we get a small hike or not? I think we tend to overestimate the impact of the Fed when we have three trillion, one trillion a year expected of annual spending for the AI trade, and when corporate earnings are growing, S&P earnings are growing at 30 percent, 50 percent if you add the special adjustments. So, Garland, I would say sometimes they just overthink the role of the Fed in the macro economy and in S&P earnings.

**Paul Sweeney** (4:08)
Sebastien, what is the AI trade today in the marketplace? Where do you think we are in the evolution of investors thinking about AI?

**Sebastien Page** (4:19)
Paul, I don't know when you covered T Rowe, how many analysts we had, but we had over 300 across our platform, our analysts published 10,000 research notes a year. They do 4,000 CEO meetings. It's one of the top research platforms in the world. The discussion in our investment meetings is about the definition, your question, the definition of the AI trade. Where are the bottlenecks? The bottlenecks are moving. The AI trade itself is broadening. It's not just CPUs or it's this memory, it's cooling systems, it's the electrical grid, it's even in some ways aerospace, and even in some small companies that end up producing this little golden component, this little piece of the supply chain for AI that becomes a bottleneck, and all of a sudden those stocks go vertical. So studying, understanding the AI trade, where the bottlenecks are moving, is a big role for fundamental analysts now. The bottom line when we look at all of it is that the AI trade continues. You just need to be, and I hate to say it because it sounds like a cliche, but you do need to be selective in how you play the AI trade.