00:00Stephanie, great to have you with us. So talk us through the logic here, because that has been the move
00:05over the past few weeks or so.
00:07Traders basically pulling back their rate cut expectations around the globe.
00:13Yeah, I mean, so we think the markets first and primary focus here is on the implications of inflation of
00:19higher energy prices.
00:21So as a result of that, you've seen front end interest rate markets reprice and reprice quite a bit with
00:28the ECB path and the Bank of England path being the most notable here, which are now pricing in hikes
00:35as a result of this.
00:37Ultimately, that I think makes sense that the markets would react this way. But you think we have to play
00:43this out a little bit more.
00:44This is not only a large price spike for energy, but this will be stagflationary in the sense that it
00:52will reduce real incomes around the world and ultimately that will weigh on growth.
00:56So the longer that this goes on, we think that the longer the price spikes are elevated, the more growth
01:06effects that you could have.
01:07And ultimately, we think that central banks will eventually need to focus on, you know, on inflate, you know, shift
01:13their focus from inflation, you know, to more of these downside growth effects.
01:16And we think ultimately the bond market, when that happens, is going to be a great diversification asset in order
01:22to do that.
01:22Well, you wrote that, you know, this is an opportunity to invest against the prevailing narrative. And I wonder what
01:28that is.
01:28I mean, if you're entering into an environment where maybe the Fed is and other central banks are going to
01:33be more dovish than currently priced, but also you add stagflationary elements into the mix.
01:39I mean, how does that translate into a portfolio, if you will?
01:44Yeah, well, I mean, if we take a broader step back, we came into this year with with resilient growth
01:49across the world.
01:50But if you looked under the surface, there was incredible divergence. And the reason why we had that divergence is
01:56because we've had tariff related shocks that have impacted global growth unevenly.
02:02And against that, we're seeing AI investment that really accelerated.
02:06So that divergence under the surface, you know, sort of, you know, suggested that there was more fragility than the
02:13resilience headline resilience would have been suggested.
02:18But but ultimately, you know, this energy shock creates even more divergence as a result.
02:24So you're layering on top of uncertainty here. And the bond market, again, relative to equities and credit, when you
02:31have uncertain environments, you know, should be a diversification asset and should start to garner a premium for for that
02:37diversification benefit.
02:38I am curious, Tiffany, about why we haven't seen a little bit more movement in some of the break even
02:45measures, the idea of what inflation expectations are longer term.
02:48Is the sense here that whatever increase that we might see in inflation, that that will be relatively short lived
02:54and that's maybe why it's not showing up?
02:56Yeah, I mean, so it depends on where you look on the break even curve. So, you know, one one
03:01year and in break evens and inflation swaps have really priced higher as a result of this.
03:07But but you don't see that if you look at longer term inflation expectations, you know, in the U.S.
03:12market, if you look at five year, five year break evens, they're actually down a little bit.
03:16You know, so ultimately we think this speaks to, you know, the broader points that we're making, which is, you
03:21know, this should be a relatively short lived shock.
03:24And ultimately, to the extent that it weighs on growth, weighs on the labor markets, you know, that that will
03:31reduce so-called second round effects, you know, and ultimately that will will keep longer term inflation expectations anchored.
03:38Is there any concern about the idea that we are going to see maybe a little bit more economic pain
03:43in Europe, certainly in Asia as a result of that?
03:46And would that have any reverberations on us here, the world's largest economy, or are we sort of to a
03:52certain extent walled off from that?
03:54Well, so the U.S. has shifted its its energy energy production status over time.
04:01So we used to be an energy importer. You know, now we're a net exporter. So that does buffer the
04:05United States from from some of this.
04:08But nevertheless, you know, global supply chains are very global. And what happens in Asia, for example, you know, doesn't
04:16just stay in Asia.
04:17You know, and the bottom line for that is, is that we think petrochemicals and other, you know, other energy
04:23from the Gulf is really powering Asian manufacturing.
04:27And so a more prolonged disruption in energy does have the potential to reverberate through global supply chains, you know,
04:36and have some more disruption in Asia that will spill over into the United States as well as elsewhere.
04:43Europe, obviously, is also very impacted by this. Global gas LNG prices are up quite a bit as well.
04:49And Europe does source a lot of that from the Middle East.
04:52All right, Tiffany, I have to leave it there. Tiffany Wilding, managing director and economist over at PIMCO, a closer
04:57look here at the potential economic ripple effects from the war in Iran.
05:01Meanwhile, we want to go to two scoops in the consumer technology space.
05:05One involves Apple said to be testing a standalone app for its Siri voice assistant.
05:10And the other involves Amazon buying the humanoid robot maker Fauna Robotics.
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