How high, and for how long?

SPEAKER_1 (0:01)

The systemic risk in the economy is affected both by levels of consumer debt and federal debt. They don't necessarily interact directly, but high levels of debt across the economy can create risks for stress in the financial system, perhaps ultimately instability in the financial system.

SPEAKER_2 (0:20)

To hear more about potential impacts of our increasing federal debt level, subscribe to P-Gym's The Outthinking Investor in your favorite podcast app.

Ethan Wu (0:29)

Thank you.

Pushkin.

As regular listeners to Unhedged will know, the Federal Reserve, the US Central Bank, has been doing this shtick for a while, where they say, we're gonna keep interest rates higher for longer. And the market has been very slow to believe that. But the Fed keeps saying, don't believe me, just watch. And finally, markets are coming around. Today on the show, we ask, if interest rates are gonna be higher for longer, what does that mean for the world that we're living in? This is Unhedged, the Markets and Finance show for the Financial Times and Pushkin. I am reporter Ethan Wu, here once again in the London studio, joined at long last by markets editor, Tommy Stubbington.

Tommy Stubbington (1:14)

Hi there, Ethan. How are you enjoying your time in London?

Ethan Wu (1:16)

I'm really loving it. I talked about this with Katie on Tuesday. I'm very easily impressed by London, but there's a lot to be impressed by, I think.

Tommy Stubbington (1:22)

Well, the thing that's impressed me is your incredible interest in British meat pies and your quest to buy one while you're in London and your constant asking for pub recommendations so that you can find somewhere to get a nice steak and ale pie, which I think you've been unsuccessful so far until yesterday, the FT Canteen came to the rescue and delivered the goods.

Ethan Wu (1:43)

They came through.

For the American listeners and for myself one week ago, the British pies are like, it's kind of like a flaky crust in which meat and seasoning and gravy is baked. That's right.

Tommy Stubbington (1:56)

It's usually some chopped up beef and gravy and onions and things underneath some pastry. Delicious.

Ethan Wu (2:01)

So now I've got truly too many recommendations to go to in London before I leave in just a couple of days. Well, thank you to the FT London Markets Team for a warm welcome. And it's an interesting time to be here on the Markets Team because there is a really big market story happening right now. I think undoubtedly the big story of markets right now is higher for longer. And I alluded to this a little bit on the top that markets are reacting strongly, but I wanna just give you some numbers, Tommy, to sort of sum up where we are. And this is from the excellent story in the front page of the FT Today.

The S&P 500 is down 5%.

Tommy Stubbington (2:33)

Yeah, it's about 5% for the month.

Ethan Wu (2:35)

The 10-year treasury yield is the highest it's been since 2007

The market estimate of where the Fed's interest rates will be in 2024 has gone up from 4.2 to 4.8%, pretty significant increase in just a month. And the yield on junk bonds, which is effectively what a risky, worst balance sheet company has to pay to borrow, has gone up this month from 8.5 to 9%. This is all a picture of rates have gone up, so people are a little bit less happy about owning risk assets. But something that's really remarkable is the 5% drop in stocks has been mitigated by how big Big Tech is in America.

Tommy Stubbington (3:17)

Right. I mean, if you look at an equal-weighted version of the S&P 500, i.e. one that kind of cuts out that heavy weighting towards Big Tech, it's down for the year.

Ethan Wu (3:25)

Yeah.

Tommy Stubbington (3:25)

I mean, this is the year when stocks had this unexpected huge rally in the first half. But it was all the kind of hype around artificial intelligence. It was all a few tech stocks that were propping up the market. If you look behind that, things look a lot less healthy, particularly now.

Ethan Wu (3:41)

Yeah. And just to unpack that, the S&P 500, and as is standard for most stock market indices, its market cap weighted, meaning that the bigger the company is relative to all other companies, the bigger its moves show up in the overall index. So if Apple moves 5%, that has a huge impact on the S&P 500 because it's a massive company. It's like 10% of the index or something like that.

What the Equal Weight Index does is, Apple's not 10%, it's 1 500th of the index.