High interest rate anxiety

SPEAKER_1 (0:01)

Bonds are back.

And so is All the Credit, P. Jim Fixed Incomes Monthly Podcast Series. From the latest trends to long-term perspectives, you'll get timely fixed income insights from leading economists, research analysts and investment professionals. Whether you're new to bonds or a seasoned investor, tune in to All the Credit wherever you get your podcasts. This podcast is intended solely for professional investor use. Past performance is not a guarantee of future results.

Ethan Wu (0:36)

Thank Pushkin.

On the very first episode of this here show, Katie Martin and I made a bet about when interest rate cuts were happening in the US. I bet for the first quarter of 2024, Katie bet for the third quarter. Well, I was wrong. Today on the show is Katie Wright. This is Unhedged, the markets and finance show from the Financial Times and Pushkin. I am reporter Ethan Wu here in the New York studio, joined by the woman that wins all the bets in her life, Katie Martin, in London.

Katie Martin (1:08)

I will have you know, I received emails telling me I was an idiot at the time of the podcast. And who's laughing now?

Ethan Wu (1:16)

I'm sure those emails were from one Robert Armstrong.

Katie Martin (1:20)

They weren't, but I keep all of his in a special file.

Ethan Wu (1:24)

Katie, why was I wrong?

Riddle me that. I said Q1, and it wasn't Q1, what happened?

Katie Martin (1:30)

You got, like a lot of people sucked into this narrative that was very popular at the time, that a big recession, big scary recession was going to come to the US, and the Fed would have to cut interest rates in response. Dude, where's my recession? It's simply not happening. If anything, and we can discuss this in more detail, the US economy looks like it might be overheating.

When that first prediction was made, your bet, which you lost just to reiterate, which was like June last year, we're in a whole different environment now. It's really quite extraordinary how things have turned around.

Ethan Wu (2:06)

It's amazing that we titled the first episode of the show, Where's the Recession? Like a question that seems like truly foolish in hindsight. But no, I mean, I remember it well. I remember, obviously the yield curve has been inverted, which is the classic recession indicator. That's been wrong.

There was prolonged weakness in manufacturing that potentially could have signaled a recession. And actually just last month in March, we've gotten the longest non-recessionary streak of US manufacturing contraction ever, ever. There's never been this much weakness in US manufacturing without a recession. And it just turned out this time was different, right?

All this classic signals across history that you could have relied on didn't tell you that much. You had to have a broader view of what was going on with supply chains and with the labor market and immigration and all this different stuff that kept the economy going so strong.

Katie Martin (2:57)

Yeah, it really feels like since the pandemic, just a lot of stuff has changed. A lot of stuff about how inflation works and how central banks respond to it has just completely changed, and we're still getting used to this new world. So just to recap a tiny bit, there was some pretty punchy inflation data in January, and everyone said, it's January, new seasonal, let's just ignore that. And then there was another strong number in February, and something quite odd happened because the market totally took it in its stride and it was this kind of look, we can all weather stronger inflation because it's a good sign that the economy is looking nice and healthy.

What has changed now is that we've had a third slightly punchy inflation reading, and then all of a sudden, screech of tires, everything has changed and everyone is ripping up their forecasts for rate cuts from the Fed for this year and markets don't like it and everyone's in a tizz.

Ethan Wu (3:56)

Yeah, that's a perfect summary. I mean, it really shows kind of how far we've come, right, that we flipped from in June of 2023, recession being the kind of primary concern to now in April of 2024, we're worried about inflation all over again. And part of the case bolstering inflation fears is actually just how strong the economy is, right? So we got earlier this week, a really strong retail sales report, which feeds right into the GDP data.

Other activity data has been good, industrial production, manufacturing are both picking up. We get month after month after month of like solid, solid, solid employment data.