Rate Cuts Are Gone. Rate Hikes Are Back.

Hello and welcome back to the Market Maker podcast. And what a week it has been. Lots going on, but namely around this idea of central bank updates. We've had the Federal Reserve in the US, the Bank of England in the UK, and the European Central Bank all come out and they've kept rates unchanged, but they've said a lot of things about what they think inflation is going to look like in the future. And consequently then markets have had varying degree of reaction, and we'll look to unpack why that is. Why is it that the conflict in Iran, which is the key, let's say, catalyst that's creating this new fear about inflation, why is it going to impact some of those central banks and their policymaking decisions more than others? So that's the main thing we're going to look at. Little update as well, just what is the latest on Iran. But before we begin, if you did listen to our previous episode, what is the current marketplace for will Jesus Christ return before 2027? Still at 3.9%, I'm afraid. It hasn't moved, Piers, not just yet.

Well, there's a bit of volatility. It got to 4.7%. Remember, 5% is that key ceiling because there's that kind of derivative on this market. Basically, which is a bet on whether the likelihood gets above 5% or not. So yeah, we'll see.

And also just a quick shout out. We're recording this at the end of Friday and just had some great news. So quick shout out to Advay and Jake. Both have just got off the phone to our partners, Morgan Stanley, And they've secured their summer internship for 2027.

Awesome.

Now that sounds like a long way ahead, but that's because we have that exclusive relationship with MS and they went through their assessment centre at the beginning of this week ahead of the general public at the, uh, in September later this year. So they've just messaged in, landed the role. So huge congratulations to Advay and Jake. And I know there's more to come.

Awesome news. Cool.

All right, well look, let's start then with the Fed because we'll go Fed, Bank of England, then ECB, if I may.

Yeah.

So the Fed held rates 3.5 to 3.75% as very much expected. Is inflation then the main thing that we're looking at here? And I know that they had their, what is conveniently calendar quarter Summary of Economic Projections. So we got a good insight, not just to, I guess what we'll cover in a second, the probing of Powell over his feelings of inflation, but also we got that telegraphed in economic forecasts, right?

Yep, absolutely. So inflation expectations have been revised higher. So this is the Fed's own forecast. It's, they've taken inflation Annualized CPI from a previous 2.4% for 2026 as their outlook, they've increased that to 2.7%. I guess there's two sides to this, right? Because at the start of the press conference, so, you know, when the Fed has their meeting, they convene as a group and the Federal Open Market Committee convene, and it's either over a two-day period as it was this time, or it's over a one-day period. We've just had the kind of two-day one, which along with obviously deciding on whether to change interest rates or not, they're also updating their forecasts and something called their dot plot, which I'll mention briefly in a minute, but it's a bit more to it. That's the meeting in the final month of each quarter. So here we are in the March meeting, the final month of Q1. So then they release their statement, which UK time is 7:00 PM. Then they have a press conference where Powell steps up and basically explains himself and why has the committee done what they've done and basically reads out the statement. But then it's the global press are all there in the room and they start throwing questions at him. And obviously the first question was, how's the Iranian situation and the energy price spike, how's that feeding into inflation and what are you going to do about it? And like Powell's like, well, actually, and actually it was interesting how Powell answered this because he actually didn't answer the specific question. He actually chose to talk about two other things. One was, well, actually forget about the Iranian situation. When you're looking at inflation in the month of February pre-Iran, then actually we're already above target and actually inflation was already kind of edging a little higher, which we were worried about. That actually really came to the fore yesterday when we had one of— there's many inflation measurements, okay? CPI is the kind of main one that we obsess about, Consumer Price Index. That's the prices that consumers pay, the end buyer, right? But there's another one called PPI, Producer Price Inflation. That's like input costs for, let's say, manufacturers. When they're buying their supplies, and then with those supplies, they're manufacturing their products and selling. So what, what are the manufacturers paying? PPI, that actually jumped and, and came in at 3.4% for the month of Feb year on year. The reason why that's notable, we were only expecting 2.9, so it came in at 3.4, which is a big chunk above expectation, but that is also the highest reading we've had for 12 months. This is all before Iran. So you could certainly say we've already got a little bit of a concern on inflation on the rise anyway. Powell then chose to maybe have a little dig at Donald Trump by saying, actually, it's also because of tariffs. And he mentioned tariffs quite a bit and how the tariff situation is still in the equation, right? Let's say if you think about Liberation Day last year, so in April last year, Trump Dumped a load of tariffs on everyone. Tariffs bumped up prices. That's still in the equation. We've gotta get to April 2026 before then that kind of drops out the year-on-year sort of comparison, right? So tariffs are still in the mix. Okay. So we've got underlying inflation concerns anyway. What Powell said about Iran is, look, I don't know, who knows? No one knows how long this situation will last. No one knows how long energy prices like oil and gas will stay this high.

Was there any fog in the conference room or no fog this time, Ralph?

He didn't use the fog analogy like he has done in the past.

Maybe smoke is more—

Smoke and mirrors. Well, we'll talk about mirrors in a little bit actually. But look, the problem, no central banker has a crystal ball. So they do have a very difficult situation right now because in the short term, energy prices have spiked. Now, will this be an issue for medium-term inflation outlook? We don't know. It might be if energy prices stay high for a prolonged period, then it will have an impact on medium-term inflation expectations, which means central banks should actually begin to think about hiking interest rates to kind of influence those inflation expectations and try and bring them back down. If energy prices do not stay high for a protracted period, well then this is a temporary price shock that in the end will not feed through to anything meaningful on the kind of underlying inflation situation. So central bankers can't answer the questions that the media were throwing at them, and obviously Powell, is very professional at swerving and basically, you know, not answering.

In order to simplify then some of the things you've been describing, is it the difference between structural inflation and external shocks? Is that a good way for someone who might need to articulate this to a client, to an interviewer? Is that how you'd break it down and categorize it?

So you think about it like this. A price shock is like a temporary price blip where it goes up and then comes back down.

Okay.

The thing about an energy price shock, you know, if it's just short-term, I mean, if the central bank raises interest rate, you know, the central bank cannot print oil. Okay. They can't produce more oil. That's not in their gift. So they can't control the price of oil. It's out of their control. That's why we have different types of inflation measurements that we look at. We look at CPI, which is your main one. CPI is a basket of goods with all the stuff in there that we as consumers buy, right? Which includes energy costs, but also includes housing costs, transportation costs, food costs, whatever, right? But we look at something called core CPI to get a better understanding as to the behavior of prices and the behavior of prices that the Fed can have an impact on with their interest rates. And so this is called core CPI. They take energy out of the equation because the Fed can't influence energy prices. They can't produce oil, right? And so here it's about If it's just an energy price spike, then we should not change interest rates because we can't impact that. In fact, you could argue if you try to raise interest rates just as energy prices go up, well then you get a double whammy here, which maybe leads to this thing called stagflation risk, where you've got energy prices higher, bad for the consumer, less consumption, bad news for the economy. Oh, let's raise interest rates and make borrowing more expensive at the same time. It's like a double whammy negative, right? So you, You shouldn't do that, but the central bank should act if the energy price increase begins to feed through into other parts of the inflation basket. Okay. We talked about plastics last week and how oil and a component within crude oil goes towards a key component of the, you know, that goes into manufacturing plastic, right? The other one is things like fertilizer. This is where, so natural gas is a key component and so of the manufacturing of fertilizer, which is a really important component of farming and production of food. So actually a gas price spike, if it's sustained, can in time, and this is the problem, in time lead to higher food prices. But think about it, if the farmers are paying for more money for fertilizers, let's say over the next few months to grow crops that they'll harvest in 6 to 9 months. And then when they're selling those crops, they're increasing the prices to pay for the extra fertilizer they spent. And so the point is that you might get food inflation in 2027 as a result of a sustained natural gas price spike in March 2026. So this is the thing about, you know, will this have a spill? Will this have leakage is the kind of word that people are using. Will this energy price spike leak into rising prices in other areas of the economy that does have an impact on other stuff? And it's that if there's leakage, then the central banks need to start acting. And this is where we may well see rate hikes. When, you know, go back a month, we were hoping for rate cuts in 2026.

Okay, so where are we then with the Fed from what they're projecting? We were expecting in December, I think the last time these dot plots came out, 2 rate cuts for 2026. Where is it now? And so as a benchmark then, what are we looking at to base a further hawkish move in rates going further forward in the future?

Yeah, well, we were expecting 2 cuts. We're now expecting none. So the probabilities of rate cuts in 2026 from the Fed, no, no probabilities. And in fact, I think we're pricing for a cut in March '27. Am I right in saying is now the kind of timeline for a 25 basis point rate cut? Okay. March 2027. You know, we were expecting 2 cuts, one in like August of 2026 and one in December of 2026. We were expecting 2 cuts this year. They're gone and we might get a cut in March '27. That's how the probabilities have changed. And when you look at the FOMC themselves, that's the people on the committee that are in charge of setting rates through their dot plot matrix, which they updated. This is where they give us essentially forward guidance on how they're intending to move interest rates, you know, in 2026. So by the end of the year, where will interest rates be? And what we've seen is a hawkish move in the dot plot for 2026 where we've seen, you know, you've seen a consolidation where, I mean, the dots, you know, the, the, the, those on the committee that were looking for cuts and we'll talk about what's his name, Steven Mirren, in a second, but he's like the, the uber dove, he's the guy in Trump's pocket looking to aggressively cut rates, right? He's had his dot for the end of 2026 down at 2%, right? We're currently at 3, 3.5. So he wants 1.5 full percentage points of cuts, right? Well, now he's revised that. He's now saying not 2%, but 2.75%. So even Myron himself, aggressive Dove wanting to slash. He's now said, oh, well, rather than 1.5 percentage points cuts, uh, of cuts is now 0.75, right? So it's become more hawkish, you might say. And really the dot plots are now telling us no cuts this year.

I just had a quick look on Polly Market.

Oh yeah.

Fed rate hike 2026. What do you reckon? Percent?

I haven't seen. I'm going to guess 26%.

14. It's come off its high. It did get up to 18.

Yeah. The thing is, it's impossible unless you've got an inside track over at the— what do they call it these days? The Department of War. That's what used to be called the Department of Defense, but Trump changed its name. But unless you got an inside track on in there, what's the strategy with this war? You know, how are they going to solve the issue of basically Iran taking the Straits of Hormuz hostage? I don't know. Who knows, right? And this is why it's almost impossible to kind of try and predict how long the Straits of Hormuz remains shut and therefore how long oil and gas prices remain elevated. It's just impossible to guess.

And from an actual market's perspective then, I mean, what was the market reaction to some of this? Was it very much that we were expecting hawkish noises? So as to what degree was this a hawkish surprise?

Yeah, so that's a good question. I mean, I would say it was nothing major happened here, right? It wasn't, A, obviously we weren't expecting them to cut interest rates at this meeting. No way. And so it was, you might call it slightly more marginally more hawkish than expected. There were definitely other central banks that we'll come onto that had more meaningful developments where we saw much bigger market reactions. But from the Fed's perspective, you know, it was kind of a slightly more hawkish than expected. And marginal kind of reactions with really the bond markets is where you're looking here, where you're trying to decipher how markets kind of reacted to this stuff. And when you go and look at the US 2-year government bond yield, well then it has gone up and this week really it's kind of risen. Well, the last week, if you go back 2 weeks, let's say, it was at 3.4%. That's the kind of lowest point it had been for actually quite a while. Actually, let me give you a— that was 3.4% is the lowest the 2-year had been since August 2022. That's when we were pricing in 2 cuts in 2026, right? But it's gone from 3.4% to now 3.9% in 2 weeks, which is a huge move. Part of that was off the Fed meeting. The Fed meeting took it from 3.7 to 3.9. It was already on the way up is my point because of the inflation risk around the Iran situation, right? So it's already going up and then the Fed meeting just ticked it up a little more. So it's gone, it's, that is a big move, right? 3.4 to 3.9 in just a couple of weeks is for that market, that's pretty sizable.

And just having a quick look at the different correlations and different asset classes, I'm just looking at a heat map of the S&P 500 year to date.

Mm-hmm.

And the big bright green spots, energy. So Exxon and Chevron are up 34% year to date.

Wow.

You'll be pleased to know that your company Micron Technologies is up 54% on the—

it was up a lot more than that, I think.

Intel up 25%. The other areas of interest though, so you've got those, some of those chipmakers and semiconductors are up, semiconductors are up really sharply on average, about 35%, 40%. Consumer defensives, so your discount kind of retailers, Costco, Walmart, they're up 13% and 8% respectively. If you look at energy outside of their utilities. Some really big gains there across the board, kind of up as far as 20% in some individual stocks. Casualties, some of the banks are down quite sharply so far year to date, and there's a bit of a mixed bag in what was the former Mag Seven, which is Microsoft are down about 20%, Tesla 16%, Amazon 10%. Apple 9, Nvidia 5, Google 2.

Yeah.

At the moment.

Yeah.

It's funny though, because people, you read a lot about, oh, the big tech are getting smashed and you're like, Google's down 3% on the year. I thought they were up like 65% something last year.

It's almost like Google amongst this Iranian situation, it's almost like weirdly Google's kind of playing a bit of a safe haven sort of, it's just hasn't gone down. Like some of the others have. The most interesting move across all the markets for me though, other than UK bonds, we're going to come onto that in a sec. Have you seen gold? So hang on, before you look, maybe you haven't looked. What do you think would naturally happen to the price of gold if we have a geopolitical crisis on our hands? Well, I mean, you would think the continuation of the trade war. And we've got an inflation spike risk. Yeah. And the dollar, you know, what would you anticipate the reaction would be?

Well, then, you know, I'm going to go buy the rumor, sell the fact.

Yeah. You'd expect gold to rise off the back of this, right? It has been slammed. It's not only has it not gone up, it is sharply dropped. And actually, if it was trading around about $5,000 just on Wednesday, And since these central bank meetings and the, again, the increase in the energy prices, again, you know, crude oil briefly got back up to $119 and it dropped from $5,000 to $4,600. A massive move here. And actually, if you look over just the last, since the kind of highs we had at the start of March, in the last 2 weeks, it's gone from $5,300 to $4,600. That's a huge drop when you might think fundamentals would suggest it goes up. So what is going on there? And people are kind of pointing towards, well, gold has been on a tear to the upside for the last 12 months, like biggest ever rally in the history of that asset. It almost became a bit of a speculative product in a way. Mm-hmm.

And some of the peers, yeah.

Well, so some of the upside was fueled by increased central bank purchasing. And what people are saying here is you're actually seeing some central banks, particularly central banks in the Gulf region beginning to sell some of their gold just to liquidate and get a bit of cash flow given the issues they're having with their energy production and shipping and selling energy and getting revenue that way. So there looks like there's that little play, which is kind of, yeah, out of all these moves, that's the one that's the most counterintuitive. And it's just really interesting sometimes you get these markets behaving in ways you that you couldn't really predict, or certainly not the textbook would predict.

Okay. Wrapping up the Fed then, final point here. I was reading about, you've said unpredictability, can't control what's going to happen with Iran. Why don't we just throw in another third element into the mix, which was, I think he's North Carolina, Senator Tom Tillis, who essentially apparently is so disgusted by the DOJ's probe, this probe that is into the building renovations under the steer of Jerome Powell, which we know that Trump did a few months ago. He's so disgusted that he's vowed to block every Fed nominee until the investigation of Powell is dropped. And what's interesting here then is that, well, you tell me, you've given us, I'm trying to keep track of your list of just hidden talents here. We've had geography, we've had history. What else have we had?

We had chemistry. Yeah. Chemistry was a good one.

No, I want a little bit of, uh, Latin.

You had a bit of physics. Okay. You want some Latin? Yeah.

Give me a bit of Latin. Describe the scenario.

So basically Senator Tom Tillis is preventing Trump's pick for Powell's replacement. There's a guy called Kevin Warsh. Um, right now Powell's term ends in May and Kevin Warsh, Trump's pick, If the Senate voted through, Walsh takes the seat from May onwards. This Tillis dude, who's a Republican, as in Trump, on Trump's side, is blocking this. He's saying, I'm not voting this through. And basically him, 'cause the kind of, the majority in the Senate is so wafer thin, it doesn't take much. If you get one dissenter, it's like screws the whole thing up. So he is kind of just trying, he's basically holding Trump hostage in a way here by saying, look, I'm not gonna vote through Walsh. Unless you drop the criminal investigation into Powell. Trump's like, well, I'm not doing that. So they're in a bit of a limbo here. Now the problem is if this doesn't get sorted out by May, what do we do? Well, there's a process for what happens in this situation, believe it or not, right? And that process is you get a chair pro tempore. Okay? That's your Latin.

You're saying it like I should know Latin.

Yeah.

I went to a normal comprehensive school, Piers. There was no Latin in our four walls.

Yeah, but what the funny thing is, even though you told me what the translation of this was before we came on air, I've now forgotten. So there you go.

Now, you know, the apprentice becomes the master.

Go on, you tell me. Cere pro tempore.

Means for the time being.

Ah, temporary chair. Basically, you need a temporary chair and Powell has put his hand up. Obviously he's the current chair, right? Basically, there's a chance that Powell stays in power, stays chair of the Fed, and this Tillis guy, I mean, he could continue this circus in theory until 2028 when Trump will come out of office. It could be possible that Powell remains the temporary chair until 2028. So again, that's another huge curveball here and another, you know, massive kind of dollop of uncertainty around everything, you know, interest rate expectation related, which is kind of the last thing we need, you know, when everything else is going on.

How about this? Oil, energy, Prices go up, food prices go up, inflation goes up, rates go up. Keep Powell in, blame Powell.

I see where you're going here. Yeah. All right.

Interesting. Maybe there's a little deal with your man Tillis and Trump here going on.

Right. That's a great conspiracy theory. I'm backing that. I'm on board with that.

Yeah, I'll maybe I'll start a thread on Reddit. All right. So let's talk about the Bank of England then, because this one was also actually probably of the three, probably the most interesting from at least a market reaction.

Yeah, definitely.

Point of view. So one of the stats though, on a top level that jumped out to me is that what's unique about the Bank of England is you get the vote split. So you mentioned the Federal Open Market Committee, the policy setters. At the US Central Bank, the Monetary Policy Committee, the MPC at the Bank of England. There's 9 of them and they voted 9-nil. Now, if you remember, there was some real like tipping points of where it was like 5-4 and getting close to that marker. But this is the first unanimous decision in 4 and a half years, which is remarkable. I didn't even know that stat was anywhere near that length of time.

Well, I remember like back in the day, the idea of a vote split was just not a thing, right? It was always typically quite unanimous and all the, you know, the whole committee were together on deciding we'll keep rates unchanged or we'll hike or we'll cut. But yeah, we definitely got a kind of diverse nature, a kind of split, or we had a quite, quite a disparate committee. And particularly there's a lady called Swati Dhingra. Who's like the uber dove. Okay. She's been voting for cuts, cuts, cuts, cuts at every meeting possible, you know, for the last, whatever, 18, 24 months. Okay. It was her vote that really set the cat amongst the pigeons here on Thursday lunchtime when this statement got released. So she's moved from her position of uber dove, always wanting cuts to now voting Actually, I don't want to cut. Let's keep rates unchanged. And even going as far as to start talking about the potential for interest rate hikes. She said a rate hike would be necessary if the energy supply shocks from the Middle East prove to be long-lasting. So it's her that's kind of completely flipped to almost being now a hawk, though, that's really scared. The markets, and that's why you got the biggest reaction in particularly UK bond markets off the back of this. When we talk about government bonds, there's obviously different durations, right? And we talk about the yield curve, which is a kind of describing how yields vary as durations vary. And we go from like short-term stuff, like 3-month, 6-month, 12-month durations through to 2 years, 5 years, 10 years, 30 years, right? And that's the longer end. Normally it's the 2-year government bond yield that we say is like a proxy for the kind of short-term central bank interest rates. So it's normally that 2-year bond that's going to be most sensitive to any kind of changing guidance from the central bank. And that thing just went through the roof. And I was talking about the US 2-year and how that's moved radically. Well, I think the US 2-year's moved by 0.5% over the last 2 weeks. The UK 2-year has done more than a full percentage point to the upside, more than double the reaction compared to the US. And it's, and it's the 2-year yield is up at 4 point, nearly 4.6%. That's the highest it's been since February 2024. You'll love this. This is higher were higher than the Liz Truss kind of storm in a teacup.

Oh no. I mean, this is it now. If you needed to overthrow even further the current Labour government, I mean, you've got all the ammo you need right now.

So this is major, right? And it could turn into a problem. It depends what happens in the next few weeks. But firstly, why has, you know, why is this happening? Why would the UK bond yields be reacting more to this whole situation than let's say the US bond yields or European bond yields. And it's actually because of the UK's vulnerability, particularly to gas price spikes. So that's what's happened this week. We'll maybe talk a little about it towards the end, but where we've seen, well, let's talk about it now, right? One of the situations that happened this week was that the Iranian missile, some Iranian missiles hit the world's largest LNG gas plant, okay? It's called Ras Laffan, Qatar's biggest gas plant. All right. European gas futures prices jumped 35%, just bang like that off the back of this situation. And so gas prices obviously went through the roof. This has an impact again on our concerns around inflation, but the UK is more vulnerable to this. And that's just because of some interesting scenarios. Like we've got a higher dependency on this gas situation. I mean, that's because, you know, we're more exposed. Basically, gas sets the marginal price of electricity in the UK. So spikes feed through more quickly. For example, during the Russia-Ukraine war, when again, gas prices surged, UK energy bills, that's your household bills, jumped faster than most other countries, right? So we've got a playbook for this from 2022. We know this happens.

Just came out in the last hour, Sky News was saying that the average annual energy bills will rise by around £332 in July, more than double the previously anticipated increase due to what you've described.

Right. There's kind of two things here, right? We've got relatively a much older housing stock. As a nation than America or Europe. I think like our average house age of house is 19, mid-'90s, or sorry, mid-'80s, I should say. So a huge amount of our housing stock was built before the '80s. The, therefore the insulation in a lot of our housing stock is pretty poor. So basically in the winter we are heating the atmosphere cuz all the heat just vanishes, meaning we need more energy to maintain a comfortable in-house temperature. Secondly—

Where does this knowledge come from, Piers?

Second—

You can build some homes or something. I mean, this is such a very niche knowledge you have.

Secondly, we as a nation, generally speaking, use gas-fired boilers and water, central heating systems. To heat our homes. That's not the case. Like you go over to France, it's mostly electric. They use electric heaters to heat their homes, for example. So we're way more dependent on gas and because of the very poor insulation situation, we're more vulnerable as a household to a spike in gas prices, right? So this, so any price hike in gas is worse news for the UK. That's why you've had the central bank go, mm, okay, and you've had Swati on the committee go, actually, I'm not going to vote for any cuts anymore. You've had these 2-year bonds go higher. The problem we have with the UK is our bond yields are really high, right? Up of getting towards, yeah, as I was saying, 4.6% on the 2-year, our kind of 10-year yield. Let me just get that. It's 4.95. That's the highest we've seen since, what is it, 20-odd years, right? I think. Am I right in saying that? Point being, if this feeds, if it all comes down to how long do energy prices stay high, if it's for a sustained period, this is going to hit the UK economy. The problem with that is the government needs to step in and do some stimulus, which means they probably need to borrow more money. Right. But the problem is If they're issuing more debt, more supply, prices go down, yields carry on going up, making borrowing more expensive. And if you're not careful, you get into this vicious feedback loop where you could see bond yields really starting to climb, and then you are in this stagflation nightmare where the central bank are having to hike. You've got inflation that's gone outta control. The economy's in recession. The government having to borrow more, and this feedback loop can really get out of hand, right? So that's the worst— not Armageddon, but that's the worst-case scenario. We're not there yet, but when you get flashes higher in the 2-year bond yield and the 10-year bond yield like we've seen this week, the speed of movement is the alarming bit. I'm sure it'll calm down, but it's just, that's a concern.

And I guess a medium consequence of that is you could also get, if you look at political change and its correlation to economic conditions, typically there's quite a sync cycle of the economy gets worse and ultimately that creates distinct political shifts from one direction to the next.

Yeah.

So here we are back worse than where we were with Truss of a government who's already under pressure on multiple fronts.

Yeah.

Because the Prime Minister's almost His role's in jeopardy. The Chancellor's under pressure. It feels fairly precarious at the moment.

You saying we're going to get Nigel Farage in the PM seat sooner rather than later? Is that what you're saying?

Well, whilst I let you guess, what is the Polly market for Bank of England rate hike? So the US rate hike is priced in the prediction markets at 14%. What do you reckon for UK?

For a hike when? This year?

In 2026?

Well, I think it's like, it's gotta be, I mean, we're pricing 2 hikes. It's gotta be 100% or nearly 90%.

72. Right.

That's a, that's a buy. I'm buying that.

Well, Nigel Farage, next UK Prime Minister in 2026, 9%.

And that's gone up, I assume.

Up 2%.

Yeah.

Yeah. Angela Rayner is currently 25 at the moment, followed by Ed Miliband.

Wow. Yeah.

Okay.

Yeah. Why not? Wheel him back out. He did so well last time.

All right, cool. Well, anything else to add? Otherwise we'll look to wrap with the ECB.

Yep. No, let's finish off with the good old European Central Bank.

Okay, cool. Well, what we'll do while I give the headlines. If you're watching this on video format, you can see that Piers has just gone into the dark. So why don't we watch Piers walk out, do a little dance for us to get the lights back going again. I will explain the next one. So the final one of the trio was the European Central Bank. This one probably, well, let's look at it because one of the things was I did see and I managed to slide into our notes. JP Morgan now sees rate increases, not just rate increases, specifically April and July. Morgan Stanley, Deutsche Bank have come out today and said slightly slower response, but nonetheless they see rate hikes in June and September. So yeah, it's funny, we've gone from, it's almost like a step change. You've got the Fed going from cuts to zero, the UK going from really a little bit further up to potentially hikes to the ECB. They're hiking.

Yeah, right. I guess it's kind of, I think that again, Europe, it's the same argument, similar argument I made with the UK when you're talking about Europe comparing it to the US, right? Europe is more vulnerable to these energy price spikes than the US is, right? So therefore it makes sense that the inflation risk in Europe, inflation expectations should be marked higher as a result of this situation than we're seeing in the US, right? So that kind of makes sense. And look, everyone is still— when I say everyone, central banks are still scarred by the inflation crisis, 2022, 2023. Where really they cocked it up. They got it wrong. They started hiking way too late and we had this inflation spike that got way outta hand, right? And we're still dealing with that today in terms of the cost of living. So they are desperate, desperate not to make that mistake again, which is why you're seeing, I think particularly the ECB, maybe they'll be a bit more trigger happy when it comes to rate hikes because they don't want to make the error again. Right? And so that's one thing. Another thing we were talking about, well, all right, does the energy price spike feed through into other areas of the economy? Talking about fertilizer, right? There's something else to consider, which is more about behavioral. Does the energy price spike feed into changing people's future expectations about inflation? Okay. If you are someone who works, you are employed at a company, okay? And you've really struggled over the last inflation crisis from a cost of living point of view where maybe your salary wasn't going up by 10% a year. That's where inflation got to a couple of years ago, right? So therefore you are getting poorer each time because prices are rising faster than your salaries. So now if you are thinking, oh my God, we're going to have another inflation crisis. I don't want that to happen again. So you start going to your boss and going, right, I need more of a pay rise. I need more of a pay rise. And your boss is like, oh God, well, all right, fine. And you can get into this loop where just human behavior and human expectations, if they think there's an inflation crisis coming, it creates inflation. Because if salaries get put up faster, people spend more money and it actually generates more demand and drives inflation higher. Okay. So one way to tackle this from a central bank's point of view is just with language. We're going to be hawkish. We see this inflation problem, we're prepared to act and do something about it, right? Then what they're trying to do is alter people's expectations. They don't want human beings expecting higher inflation in the future. They can dampen that expectation by being hawkish today. The, so the problem is though, if they're hawkish today to influence people's expectations about the future, they've kind of got to follow through on that. So if they're hawkish and they're saying, right, we're going to hike rates in July, let's just say, pick that month, we're going to hike rates in July. They kind of have, they kind of made their bed. They kind of have to raise rates in July. Otherwise, People will go, oh, well, hang on, the central bank's not acting. Oh my God, we're going to have another inflation crisis. And so people's expectations get out of hand again. So they're playing a dangerous game. It's probably one they have to play, but they're going to have to follow through on this hawkish chat and they're going to have to raise rates.

Is there a way of engineering it where because of the Eurozone debt crisis, so take us back 12, 15-odd years or so, then what they created then were quite unique instruments on how to deal with the breadth of economic performance or severity of economic decline between the more prosperous and the not so sort of the North and South division, if you like, if we were talking about the PIGS, for example.

Yeah.

So here, could they do some top-level action in order to counteract then from the consumer side, then under the bonnet you do the mechanics of where I know there was all these ways of buying proportionate amounts of certain yield thresholds on certain nations if they were to run into trouble.

Yeah.

So could it be a lot more multifaceted where there, there's a, there's kind of an outward-facing ECB and an inward mechanical ECB? Controlling it.

Yeah, I'm sure there is. And look, you know, there are some clever people that work behind the scenes at these banks and they, you know, in the past and certainly during that crisis came up with some phenomenal tools and just ways of kind of getting, you know, managing a situation. And so I'm sure there's some funky stuff that they've got in the back pocket that they can roll out. I don't think we're anywhere near requirement for funky stuff yet, right? It's just, guys, we're gonna hike rates by 25 basis points, maybe 50, you know, in the next 9 months. That's kind of where we're at. All right? We're not like full-blown crisis mode, LTROs and whatever else being thrown, kitchen sink being thrown at the problem. But yeah, I mean, you're right to maybe start to think about that if, and it always comes back to the same point, Do energy prices stay high for longer? Yes or no? No one can answer that question. And ultimately though, that's the situation that will determine how this all plays out.

On that final point then on energy, I wonder if you could just explain, because one of the things I was reading is on Friday, it was not Qatar, it was Kuwait saying that an oil refinery was hit by a drone attack. You mentioned earlier about the world's largest LNG plant, Ras Laffan, getting hit, and that's what destabilized— what's it called? The South Pars, isn't it? The area where the gas is situated, which is in between, in the waterway between the two, or the contested area just outside of the Houmous. So here, can you explain to me just quickly, and for everyone listening, this idea about refining versus extraction?

Right. You can't use crude oil. People, you know, human beings, we can't, it's not a, it's not a usable form. So what we do is we pull it out of the ground. Okay. We then ship it to a refinery. In a refinery, they crack crude oil. They take it through this kind of chemical process, breaking crude oil down into its component parts. Of which there are many, many component parts. The largest component is petrol, the stuff we put in our cars, or gasoline as the guys over in the US would call it, right? That's the biggest component. But you've got stuff like jet fuel, you know, paraffin, you know, all this other stuff that gets cracked out and then packaged and shipped off to whoever needs jet fuel, right? So What happened when the— in, in Kuwait, it was the refinery that got hit. And so what we look at is, well, what's the price of the component products post-refinery relative to the price of crude oil? This is what we call the crack spread. Okay. So it's the price of crude oil and then the price of the component parts after you've cracked crude oil in the refinery process. What's happened after that, um, that attack on the Kuwaiti refinery, the crack spread dramatically widened, meaning the component prices of the component parts shot up. That's because there's supply risk for the component parts now, 'cause a Kuwaiti refinery has gone offline. So you could get a situation where the price of crude oil settles back down. Lower and everyone's, well, hey, fine, all good. However, if the refineries are out of action, the crack spread widens, meaning your gas prices, your jet fuel, your paraffins stay super high, and we still have the inflation risk and the inflation problem. So it's not just crude oil that you've gotta be monitoring here.

And as you said earlier, natural gas is also the primary feedstock for nitrogen fertilizer. And that consequence then on the food price shock. So oil affects petrol and plastics, gas affects heating, electricity, essentially a double-ended squeeze on the consumer. Correct.

Which is why the ECB— let's finish on a cheery note then, which is why the ECB don't want the consumer to start panicking and start expecting inflation to rise and then behaviors making inflation rise. So that's why they're like, okay, let's get the rate hiking lever, let's dust it off and maybe start making a move as early as next month.

All right. Fantastic. Well, look, we've, we've, you managed to squeeze in some chemistry. We've had some Latin, we've had a little bit of geography there at the end as well. So you are a fountain of knowledge as always, Chris.

Well, I don't housing insulation. You know, was in there in the mix there.

Again, another one of your top 3 chat-up lines for the bar this evening.

Tune in next week because I've got something awesome coming. That's all I'm saying.

And on that note, do tune in next week. And I know there's a portion of listeners who are tuning in who are not subscribed to the channel. So please do. And then have yourself a wonderful weekend. Take care, everyone.

Have a good one. Thanks a lot.