00:00Good morning. Morning. December? Yes, definitely in the cards. On the cards or erasing certainty now?
00:06Given the statement by Waller just now and Mary Daly, it's getting very close to near certain.
00:14And one factor to consider is that once the market probabilities are this high, Fed follows through.
00:22And December's the blackout, sorry, Friday's the blackout period for the December meeting.
00:25So they have a few more days to correct course. Yeah. Otherwise, if the probability is 70, 80.
00:32Let's get a bit more nuanced. What kind of a cut will it be, though?
00:36Because Waller's talking about kind of meeting by meeting beginning of next year.
00:39Is it going to be a hawkish cut? I will Powell have to recognize there are those on the FOMC that are still concerned about inflation?
00:47Absolutely. Absolutely. I think it'll be a cut that comes with a statement that from here on, we are meeting by meeting.
00:54We are watching inflation numbers. They are rightly so worried about growth at the moment on the labor side, I mean, with the unemployment rate picking up a bit in the last data.
01:07And then we have this gap of data where some of the data releases won't be available until after the December meeting.
01:14And so they can really afford to wait and see is the labor market deceleration continuing or are they now seeing more of a pickup in inflation?
01:25To what extent, though, given the choice, if Jay Powell does have to take this massive U-turn from the hawkish tone he's taken previously, does that erode his credibility and by extension the Fed's?
01:34Markets have been questioning that for quite a while now, saying that how can the probabilities reflect a change from 30 earlier in the week to now 90, that it's flip flopping quite a bit with very little data to back it up.
01:52Yeah. So it's very much, you know, are they positioning for all of next year?
01:58What is 2026 going to look like? And we've just sort of published our 2026 outlook, thinking through how much more they can cut.
02:06Because remember, they're not cutting because this is a big growth scare in the U.S.
02:10In fact, many are questioning why they're cutting at all when growth is in the sort of 3 percent handle and inflation is also well above their target.
02:20So they're likely to position that we think neutral rate is somewhere lower. Policy is still restrictive.
02:25We're going to cut once in December. Then it's meeting by meeting.
02:29And then let's see how the data pans out for the remainder of 26, which we think will afford them a few more cuts.
02:37Well, to your point about this data, why not lean into the narrative of an insurance rate cut?
02:42Why has the Fed not not pressed that button more?
02:45Well, that's an interesting question. It is indeed exactly that. It's an insurance rate.
02:49They just refuse to brand it that way.
02:51Yes. It's well, it's more that they're well above their perceived neutral, which is around 3 percent.
02:59And growth in labor data has indeed moderated enough for them to have something to latch on to for insurance.
03:10But it is an insurance rate cut.
03:12But you have not given up being worried about inflation, though.
03:15And we do. I mean, I noticed that you talk about inflation averaging at 3 percent next year and your overweight inflation protection assets.
03:23Absolutely. We are quite concerned as inflation being one of the most significant risks for us in 2026.
03:32As I mentioned, the interest rate, the inflation rate is not back to the target.
03:39What concerns me is that we are also going to see a little bit of fiscal spending from the U.S. administration in 2026.
03:47Trump's been talking about his $2,000 checks as a tariff payback to the consumers, which is spending, really.
03:57It's fiscal spending. On top of that, we really are seeing cuts in an environment where economy is likely to accelerate again.
04:07And where does a rate cut into a tech stock boom, give or take, last couple of weeks or so, where does a rate cut into that kind of boom for U.S. tech, where does that leave us?
04:18Where does that leave your U.S. weightings versus elsewhere?
04:20So I would say that beginning of this year, in 2025, I used to think, well, tech stocks are not really concerned about the interest rate environment.
04:29That's more relevant for cyclical stocks. That's more relevant for small caps.
04:33But you've seen a bit of tech spending that's now not funded by their cash flows alone, and they're raising debt.
04:42So it is starting to be relevant for tech stocks also, since they're going out in the market and raising debt.
04:49How important is it that NVIDIA keeps spending money or kind of driving an ecosystem for the U.S. economic outlook?
04:58How important is that data center build-out, and how important is NVIDIA to that data center build-out?
05:03So I think this year, for the first time, Guy, we saw the capital spend by the hyperscalers, by the tech semiconductor companies, actually show up in GDP data.
05:16It was significant in the first half, where the first half we were expecting a sort of negative print for technical reasons.
05:23And in fact, we got a positive one, solely driven by about a near 1% contribution from capital spend.
05:32I think it is important, but ultimately, U.S. is still about the consumer.
05:37And if you don't see unemployment rates pick up, we don't absolutely – I mean, it's marginally helping.
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