Negative headlines, resilient markets

Ronnie Wexler (0:01)

Hey everybody, welcome back to the Barclays Brief. It's Ronnie, it's Monday, September 28th, and I'm so excited to have Ajay back on the pod. Just to remind everybody, Ajay is our Global Chairman of Research, and he drives our macro research and strategy effort. And Ajay, I think the last time we did this together, in fact, I know, it was right after the Iran conflict picked off.

In hindsight, we did a pretty good job of seeing signal through noise in that moment. We find ourselves in another moment in time, in my view, that requires just that. The current macro backdrop leaves us with a lot of risk factors to grapple with. Bond yields are higher, central banks are tightening again, oil prices remain elevated, and yet the global economy keeps surprising to the upside. And as I walked up to the studio from my desk, I saw the NASDAQ up about 15% on the year so far. So welcome back. A lot to unpack for our listeners. 2026 has been quite an environment, quite a market cycle. We've had a lot to grapple with.

You just recently published your latest quarterly Global Outlook. I love the title, Reluctantly Optimistic. Can you walk us through your intent with that title and the views that drove it, please?

Ajay Rajadhyaksha (1:11)

Sure. And it's always good to be back here, Ronnie. This is one of my favorite podcasts, and not just because you guys helped me on.

Ronnie Wexler (1:18)

That's part of it, though.

Ajay Rajadhyaksha (1:21)

That plays a role.

Ronnie Wexler (1:22)

But your calls have been spot on, so we'll keep having you on.

Ajay Rajadhyaksha (1:26)

Better lucky than smart. So the point of the title is that the headlines have, like you said, turned relentlessly negative.

The bond yield move is the move that is most visible, but you're right, central banks have pivoted from holding to tightening. We thought Iran, US at some point would start to deflate, it shows no signs of doing that, the oil is back by $100, but underneath that surface, the three things that have driven the global economy, the US economy, three months ago, six months ago, nine months ago, are the same things that are driving it now, with remarkable consistency. And yes, they are all US centric, but they are all pertinent. One is the strength and intensity of the AI CAPEX cycle. The second is the strength of US corporate earnings, which are absolutely spectacular. And the third is the resilience of the US consumer. I don't especially want to be optimistic. It would be easier to go doom and gloom, but...

Ronnie Wexler (2:21)

If you just read the newspaper, you think that everything should go down every day.

Ajay Rajadhyaksha (2:24)

I look at the numbers and I can't help but be. That's where the title came from. Right.

Ronnie Wexler (2:28)

Well, I love the title. Let's dig into a little more of these deteriorations in the macro backdrop.

And more importantly, why they haven't translated into much weaker growth. You've done a lot of work on this. Why don't you tell our listeners about why they haven't translated?

Ajay Rajadhyaksha (2:42)

Right. So, this is actually a great question. Usually, Ronnie, there is a self-correcting mechanism built in between interest rates and the US economy in particular. Interest rates go up beyond the point. The cyclical rate-sensitive parts of the US economy, most importantly housing, start to react. As a result, there is weakness in the economy that propagates outside of housing to other sectors. The interest rate market takes a look at that and starts to slow down on any sell-off. That's the self-correcting mechanism. Now look at what has happened in this cycle. Housing has been in the dumps for the last five years. So its ability to cause more damage to the US economy, because everyone jumps up and down about mortgage rates being where they are. They were at 6.5 percent in the first half of 2022

We went from 3 to 6.5 and then basically a bounce between 6.5 to 7.5 for the last five years. So housing's ability to do more damage is limited and it has been replaced, Ronnie, by what seems like a very rate insensitive AI investment cycle. A Google, a Meta, yes, they are doing debt financing. They are spending an enormous amount of money, but they are not going to pull back on that financing because they say, look, the 10 year went from 4 percent to 5 percent when they did not blink.

When high bandwidth memory prices tripled in the last 18 months, they are not pulling back and if they're not pulling back, the US economy is responding less to the rate sell off, less to central bank tightening than before.