00:00So the 30-year yield at 553.76. How concerning is that? What kind of a comment is it on
00:06future
00:06inflation and growth? Yeah, I think, you know, the market is reading that as further inflationary
00:14pressure. You know, where we find ourselves today is we still don't have a resolution
00:18on the U.S. around conflict. And it is feeding into concerns over high inflationary pressure.
00:25You know, we've been hearing over the prior week from a number of Federal Reserve members that,
00:31you know, there is an expectation that underlying inflation could actually push through 2 percent
00:36as firms are now, you know, increasing their underlying costs and their prices. And that's
00:43likely to also filter through inflation. And clearly, we're seeing the impact of high energy prices
00:50also impact the consumer. And that is leading to, you know, fueling those concerns of high
00:57inflation going forward. Yeah, I mean, Scott Besant was talking about Federal Reserve policymakers over
01:03the weekend, about how they should keep an open mind on rates. He brought up Volcker. He said
01:08productivity was going to fix all of this. At the same time, you know, his long end, which is where
01:13he has more influence than the Fed potentially is rising quite strongly again. In fact, we're above
01:20levels before which the Treasury actually made that, you know, quote unquote intervention a few weeks
01:25ago. So do we see more fiscal intervention? Well, I think there's, you know, the reality is the
01:34markets are pricing this uncertainty lasting for a longer period of time because, you know, we've been
01:41here before. In June, the markets were quite elated with the fact that we had apparently reached a
01:46trade truce and an agreement on a resolution of the war. But as we prolonged over the course of the
01:52summer, we've realized that, you know, we're very far away from it. And we keep going back and forth.
01:58So I think the markets are pricing this higher uncertainty lasting for a longer period of time.
02:02And that is being reflected in the bond markets where we're seeing the longer end, you know, trade a lot
02:06higher. How much pressure is this putting on the Federal Reserve? At what point will it look like
02:12a mistake to have only gone 25 basis points and only this month? Absolutely. I think, you know,
02:21obviously the Fed remains very data dependent. And, you know, we've got a big data point coming out
02:26this week with the non-farm payrolls. That is going to be a very important number to be tracking. And
02:32along with that, you know, if we are unable to see any further resolution and those energy prices
02:38continue to creep higher, that is going to force the Fed's hand again should both of these factors
02:45continue. So if we do see strength in the labor market persist and alongside the fact that inflation
02:51continues to move higher, that, you know, raises the case for the Fed to increase again in October.
02:59Yeah. And I mean, if we weren't that concerned about inflation expectations getting, you know,
03:04unanchored or de-anchored with the 10-year yield at 523 now and the 30-year yield at 5, almost
03:1054,
03:11we surely have to be getting a little bit concerned about that now, no?
03:16Absolutely. I mean, we're seeing it reflected in equity markets, you know, that that pressure is
03:20being echoed in equities where equities with higher, longer duration are getting pressured
03:26from the higher rates because obviously they're being priced at that. They're being
03:32discounted at much higher rates now compared to what we were seeing at the start of the year.
03:36And so equities that have shorter duration are being favored in this current environment where
03:41higher dividend yielding equities that have much shorter duration are being favored given the fact
03:47that they aren't being discounted at such high rates. And at the same time, they're offering
03:52investors a bit higher yield compared to the broad benchmark index. And that is allowing for a bit
03:59more cushion. And I think the other interesting fact that we have seen is with equity markets now,
04:04you know, at pretty high valuations, having that tilt to high dividend yielding portfolio
04:10is allowing for a bit more diversification. And hence, you are, you know, putting on that trade at
04:17much better valuation. So it's giving you a bit more cushion in your underlying portfolio as well.
04:22If we continue to see oil prices rise, putting pressure again on yields and on inflation
04:28expectations and so on, how much longer could that continue to be the case if we start to see it
04:36impacting the labor market? So at what point, I mean, obviously, the labor market has held up so far
04:42and, you know, this month may be no exception. But would we start to see an impact already from next
04:47month?
04:51Yeah, there is a very high likelihood. You know, we are seeing dual impacts, the efficiency of AI also
04:58having a very important impact on the labor market. And at the same time, with high energy prices,
05:04that's feeding into the underlying consumer, purchasing preferences. And it's also impacting
05:09corporate balance sheets. And hence, you know, it drives the impact on, you know, the labor force and
05:16labor market. There is a very high likelihood. I mean, you know, a few years back, if oil was
05:22trading at around 100, 506 levels, we would have seen a completely different picture. I think the
05:27market is slightly more resilient now with other renewable sources of energy. And so we see a bit
05:33of a lag in the impact that is felt across the labor market. But we're reaching a point where,
05:38you know, this has gone on for far too long. And that is likely to have a much bigger impact
05:45on the
05:45labor market and could also influence the Fed's decision making.
05:50Anika, at what point would we see an emergency move by the Federal Reserve? So if, for example,
05:55the two-year yield were to top 5%, which at this point is not unimaginable, we're very close to 492
06:01right now. Would that trigger some kind of an emergency move from the Fed?
06:08Well, I mean, if we look back over history and look at when the Fed has intervened with an emergency
06:13move, you know, it would have to be something a lot bigger, like we've seen during the COVID pandemic,
06:19we've seen the Fed intervene during the banking crisis. I think if we would see a move where oil
06:28prices are trading at a much higher level for a significant period of time, then that would
06:33trigger the Fed to intervene. But at this stage, I would caution that they wouldn't be intervening
06:40at this point in time.
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