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This week we’re joined for the second time by Karen Ward, Chief Market strategist EMEA for JP Morgan Asset Management. Karen was also recently appointed to the Chancellor’s Council of Economic Advisers. A year after we last spoke to Karen we’re taking stock of the global rate-rising cycle, how far through we are, where interest rates might peak, how central banks will likely respond to data from here and whether a recession is on the cards.

We look into the future discussing whether markets have forecasted inflation and interest rates well or badly, and in particular what this means for bond investors going forward.

Finally, we look at what the crucial data points are over the coming months and what Karen’s biggest worry is for the next year. If you’ve got an interest in making sense of the economic environment and what it means for investors this is a must-listen!

Links mentioned:

• Last conversation with Karen in November 2021 

• JP Morgan’s latest guide to the markets chart pack

We discuss:

A year into the rate hiking cycle we take stock of: 

• Bank of England rate rises – Karen’s take on how far through the cycle we are 
• What Karen thinks the bank is looking at or should be looking at to guide future moves 
• Where Karen thinks rates are likely to peak  
• What this means for economies and asset classes. Potential scenarios: 
  • How bad does the downturn need to be? Is a mild recession enough? Maybe a mild recession will do the job. Important data here: inflation and labour market 
  • Ideal scenario: CPI starts going down, due to things like freight, commodities, and transitory factors -> labour market needs to see wage growth coming down a bit 
  • Is it priced? Bonds currently pricing 5% peak rates in both UK and US. ECB to 3% 
  • Underappreciated angle: inflation is not necessarily bad for companies, and can be a sign of pricing power  
• We talk about whether central banks were too late to start hiking rates, why that was the case with the balance of risks they were facing (at the time they preferred being too late over being too early), and how central banks are weighing those risks differently now 
• We cover potential medium-term inflation outlooks and whether markets are now doing a good job of anticipating future falls in inflation 
• Karen covers what this means for investors in bonds: yields on offer are much higher than a year ago. This could be good news for bond investors if inflation falls 
• What key data points Karen is looking out for:  
  • Corporate earnings - they have remained fairly strong, but this is where people are looking for potential signals of weakness in 2023 
  • Labour markets remain key for central bank decision-making, not just unemployment but data on vacancies too. The first thing to watch for is vacancies falling 
• We asked Karen what is her biggest worry of the next 12 months 
• Zooming out, we cover one of the mega-themes for the next decade: the energy transition and how this is being potentially underestimated in scope and scale 

What’s one thing you would like listeners to take away from this: 

Since we are in a higher rate environment, let’s not reflect too much on this year’s returns, reflect on the better opportunities available to investors in fixed income for example. Don’t focus too much on the idea that higher rates are bad for investors. 

What is the most underappreciated thing about investing?

If you can detach your emotions from decision-making and take a step back from the noise and get down to a single question. If you can get the one single question correct, you’re going to do quite well, and right now the key question is is inflation going to behave itself? And also stay open to opportunities.

Any recommendations for good books or podcasts:

For the week: The Money Minders: The Parables, Trade-offs and Lags of Central Banking: Jagjit Chadha - A walk back of the last 100 years and all the different regimes of controlling money and when and why they broke down 

For the weekend: A Gentleman in Moscow: Amor Towles 

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