Persistent Downside Surprises in the UK Persist to Benefit Gilts: 3-Minute MLIV

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00:00It's kind of very nice to have you with us. Let's start by talking about some of the data we've had

00:04out of the UK today. We've had the inflation print, which has not come in as hot as had been

00:08feared, and traders are adding to Bank of England easing bets as a result. Is the sense here that

00:15if inflation isn't quite as much of a problem as we thought it was, there are fewer barriers to

00:19easing for the BOE? Yeah, I mean, I think that's absolutely it, because you have a weakening

00:23labour market, growth isn't as strong, and so inflation was really holding you back.

00:27And I think what's actually super interesting about the inflation data this morning is that

00:31it was to be expected you'd get a downside surprise. It's this emerging seasonal trend

00:35that we've seen, where because you have these big price resets in April, so stuff like your phone

00:41bill rises by RPI, it's the start of the fiscal year in the UK, so you have increases in taxes,

00:47et cetera, that come through at that point, as well as a price energy cap increase, you get this

00:52distortion in the data. And it wasn't an issue before COVID, because inflation was low. But now when you

00:57have higher inflation, it's adding to that persistence. And so you see this trend where

01:01activity as well as inflation surprises to the upside in the first half of the year in the UK,

01:05and then into the end of the year in the fourth quarter, it surprises to the downsides. You can

01:10expect that to continue, and it likely means that a Bank of England cut this year is very much in play,

01:16and that should be the benefit of guilt, especially at the front end.

01:18Okay. We're getting some data out of the UK. We're not getting any data or much out of the

01:24United States. The data we have is distorted by a number of different factors. Are we flying blind

01:30here? How can we get a handle on what is really happening?

01:34Yeah, I mean, there are data points here and there that we can look at, and so that's why last week we

01:38had such a big focus on bank earnings, because that tells you about the consumer and businesses.

01:43But it's something that I'm very much worried about with regards to the US in terms of giving

01:47a false signal to the Fed. So we've had the reference week now for the October employment

01:53report that happened during the shutdown, and so it's likely to be artificially weak. And the worry

01:58is that the Fed reads that. It's one of two employment reports we get before the December

02:03meeting, which I think is more in play than the October meeting. And we don't know if we'll get the

02:07November report in time in terms of will it happen when the shutdown is occurring still, or will it not?

02:12And so it could make the economy look artificially weak, force the Fed to overease, and then you might

02:17have an overheating economy into 2026.

02:20Are those the jitters that are fueling the gold drop? I mean, we're trying to do a little bit of

02:24detective work here in terms of what is actually, maybe kind of underpinning that move. What do you

02:29think it is?

02:30Yeah, I mean, I think it's just kind of a frothy market, right? You've had such a large move in

02:34such a short period of time. If you think about it as a reallocation away from dollar reserves or

02:39anything else, the market sizes are very different, right? The US dollar market is much larger than the

02:45gold market, which is larger than the silver market. And so as you get these kind of jitters and you're

02:50just saying, oh, it's a really frosty, elevated level, you don't necessarily need a big news or

02:55anything to have that feed out in quite an aggressive way. What I will say is in the long

03:01term, I think you're still likely to get more gold upside from here. It's a structural shift,

03:06right? You're having central banks that are realizing that they need to have reserves that

03:10are comparable to the average across market. So China, for example, it's at something like five

03:16or six percent of reserves in gold, and they need to get up to 20 percent. So that's going to be a

03:20bid that continues, especially if we are worried about kind of the risks that are ongoing, like

03:25politics, et cetera.

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