1 00:00:05,960 --> 00:00:08,119 Speaker 1: Welcome to Fear and Greed Q and A, where we 2 00:00:08,160 --> 00:00:11,880 Speaker 1: ask and answer questions about business, investing, economics, politics, and more. 3 00:00:11,920 --> 00:00:14,400 Speaker 1: I'm Michael Thompson, and good morning Sean Aylmer. 4 00:00:14,600 --> 00:00:16,200 Speaker 2: Good morning Michael, Sean. 5 00:00:16,320 --> 00:00:19,520 Speaker 1: Today the question is what is the impact of a 6 00:00:19,600 --> 00:00:22,599 Speaker 1: potential rate cut in the United States? Now? The US 7 00:00:22,640 --> 00:00:25,360 Speaker 1: Federal Reservers tip to start cutting interest rates when it 8 00:00:25,440 --> 00:00:28,880 Speaker 1: meets on September sixteen and seventeen, so not long ago. Now, 9 00:00:29,280 --> 00:00:32,920 Speaker 1: after the latest jobs report showed almost no growth in hiring, 10 00:00:33,080 --> 00:00:36,080 Speaker 1: just twenty two thousand jobs and unemployment rising to four 11 00:00:36,080 --> 00:00:39,000 Speaker 1: point three percent, the highest in nearly four years. The 12 00:00:39,080 --> 00:00:42,440 Speaker 1: Fed is going to get fresh inflation data next week, 13 00:00:42,520 --> 00:00:46,280 Speaker 1: and the President's tariffs are expected to cause a spike, 14 00:00:47,159 --> 00:00:51,839 Speaker 1: but still markets are predicting a rate cut. So in 15 00:00:51,960 --> 00:00:55,360 Speaker 1: unpacking all of this, I'm going to ask you first 16 00:00:55,720 --> 00:01:00,560 Speaker 1: for a lesson, a lesson in bond yields, a lesson 17 00:01:00,640 --> 00:01:05,600 Speaker 1: in interest rate expectations and how rate expectations affect bonds. 18 00:01:06,160 --> 00:01:06,880 Speaker 1: Take it away. 19 00:01:08,680 --> 00:01:10,759 Speaker 2: There was no need to ask. There was no need 20 00:01:10,800 --> 00:01:13,520 Speaker 2: to ask. It was always coming. Might later on just 21 00:01:13,520 --> 00:01:15,480 Speaker 2: talk about why we might not get a rate cut 22 00:01:15,560 --> 00:01:18,319 Speaker 2: next week. But just part that for the moment. Okay, 23 00:01:18,560 --> 00:01:21,319 Speaker 2: bond rates, why do they matter? Because they are the 24 00:01:21,440 --> 00:01:26,960 Speaker 2: almost risk free rate of an investment return. Putting your 25 00:01:27,000 --> 00:01:30,520 Speaker 2: money in a US government bond is pretty much as 26 00:01:30,600 --> 00:01:34,319 Speaker 2: safe as it gets, safer than a bank, same with 27 00:01:34,360 --> 00:01:37,920 Speaker 2: an Australian government bond, with an Australonia going bond, that's 28 00:01:37,920 --> 00:01:42,240 Speaker 2: safer than the Commonwealth Bank, for example. Because these are 29 00:01:42,600 --> 00:01:46,920 Speaker 2: the almost risk free rate of investment returns, all other 30 00:01:47,000 --> 00:01:49,800 Speaker 2: asset classes that might be a bank deposit, might be 31 00:01:49,840 --> 00:01:52,000 Speaker 2: a share in a bank, It might be a higher 32 00:01:52,120 --> 00:01:55,120 Speaker 2: risk corporate bond, it might be a junk bond. What 33 00:01:55,360 --> 00:01:58,440 Speaker 2: they return, what they yield for your one hundred dollars 34 00:01:58,480 --> 00:02:00,440 Speaker 2: that you're putting into them or million dollars you're putting 35 00:02:00,480 --> 00:02:05,720 Speaker 2: into them, are all based off the bond rate because 36 00:02:05,920 --> 00:02:09,119 Speaker 2: there's a risk premium added to each of those. That's 37 00:02:09,160 --> 00:02:12,240 Speaker 2: why bond rates are so very very important. So when 38 00:02:12,240 --> 00:02:16,640 Speaker 2: a bond rate moves, so does everything else. The expectation 39 00:02:16,720 --> 00:02:21,200 Speaker 2: of return, inequity moves, expectation of corporate bonds move really 40 00:02:21,240 --> 00:02:23,600 Speaker 2: really significant. You're with me so far, Michael, You're loving. 41 00:02:23,480 --> 00:02:25,960 Speaker 1: It so far. So far, I am enjoying this. Please 42 00:02:25,960 --> 00:02:26,280 Speaker 1: go on. 43 00:02:26,320 --> 00:02:30,640 Speaker 2: Right, A. Bond rates You know what they reflect, don't you, Michael? 44 00:02:30,639 --> 00:02:34,239 Speaker 2: You said it in the intro. You've been learning expectations 45 00:02:34,320 --> 00:02:38,560 Speaker 2: of future interest rates. Get a bit technical here, but 46 00:02:38,639 --> 00:02:42,560 Speaker 2: if investors think interest rates are going to fall, which 47 00:02:42,600 --> 00:02:46,880 Speaker 2: they do in the US at the moment, then they 48 00:02:47,040 --> 00:02:50,280 Speaker 2: tend to buy more bonds because the bond might be 49 00:02:50,720 --> 00:02:54,880 Speaker 2: yielding four percent. Interest rates are going to fall, so 50 00:02:55,000 --> 00:02:58,360 Speaker 2: they think they're going to yield less. Therefore they jump in, 51 00:02:58,639 --> 00:03:01,639 Speaker 2: they buy more of them now for the yield falls, 52 00:03:01,680 --> 00:03:05,080 Speaker 2: making sense, got it? When you buy more of something, 53 00:03:05,160 --> 00:03:09,800 Speaker 2: what happens The price goes up. So it's almost kind 54 00:03:09,800 --> 00:03:16,320 Speaker 2: of doesn't kind of sound logical. But when investors demand 55 00:03:16,720 --> 00:03:20,480 Speaker 2: bonds when there's a rally in the bond market, yields 56 00:03:20,720 --> 00:03:23,480 Speaker 2: four So you've got to keep that in mind. Ye, 57 00:03:23,919 --> 00:03:26,480 Speaker 2: your question, there's my lesson. Did you like it? 58 00:03:27,440 --> 00:03:29,760 Speaker 1: I did? It feels like that was just all context. 59 00:03:30,400 --> 00:03:33,600 Speaker 1: That was just so far. We've spent three and a 60 00:03:33,600 --> 00:03:36,560 Speaker 1: half minutes on context now. 61 00:03:36,480 --> 00:03:39,920 Speaker 2: But it's so exciting these bond markets, Okay. 62 00:03:40,120 --> 00:03:41,760 Speaker 1: And it matters. So this is the thing it is, 63 00:03:41,840 --> 00:03:45,040 Speaker 1: doesn't that vitally important to understand that? And so now 64 00:03:45,040 --> 00:03:47,160 Speaker 1: we can all say, yep, everyone can pass a test. 65 00:03:47,160 --> 00:03:49,160 Speaker 1: If you were to test us on it now, please 66 00:03:49,240 --> 00:03:49,520 Speaker 1: roll on. 67 00:03:50,080 --> 00:03:53,880 Speaker 2: So the question what happens if the Fed cuts interest 68 00:03:53,960 --> 00:03:56,240 Speaker 2: rates next week? Is it next week? 69 00:03:56,560 --> 00:03:59,560 Speaker 1: It is next week, next sixteenth, and seventeenth, and next week. 70 00:04:01,000 --> 00:04:04,680 Speaker 2: Unfortunately, the answer is probably not much. But there's a 71 00:04:04,760 --> 00:04:08,600 Speaker 2: really good reason for that, because the market likes to 72 00:04:08,640 --> 00:04:12,800 Speaker 2: be informed and so most of the movement occurs before 73 00:04:12,840 --> 00:04:16,920 Speaker 2: the action actually happens. So what you've seen is bond 74 00:04:16,960 --> 00:04:19,520 Speaker 2: nils falling in the US because people think the Fed's 75 00:04:19,560 --> 00:04:22,800 Speaker 2: going to cut interest rates next week. The action has 76 00:04:22,839 --> 00:04:27,479 Speaker 2: already occurred in daily investing. Right, you get an economic 77 00:04:27,560 --> 00:04:30,200 Speaker 2: data point you mentioned the twenty two thousand US jobs 78 00:04:30,200 --> 00:04:34,520 Speaker 2: report really weak, people think, ooh, the Fed needs to 79 00:04:34,640 --> 00:04:36,960 Speaker 2: lower interest rates to boost the economy, to help the 80 00:04:37,279 --> 00:04:41,320 Speaker 2: labor market. That's why we've seen bond yils fall in 81 00:04:41,400 --> 00:04:44,640 Speaker 2: recent days. You might get other data coming out like 82 00:04:44,720 --> 00:04:47,880 Speaker 2: inflation that you mentioned. If that's higher than expected, you 83 00:04:47,920 --> 00:04:51,320 Speaker 2: may actually find bond nils rising. So day to day 84 00:04:51,800 --> 00:04:55,920 Speaker 2: investors take a punt based on this economic data on 85 00:04:56,040 --> 00:04:59,880 Speaker 2: what future interest rates will be, and that's reflected in 86 00:05:00,160 --> 00:05:06,800 Speaker 2: bond yields. It's why investors hate it so much when 87 00:05:06,839 --> 00:05:12,760 Speaker 2: what is supposed to happen doesn't happen, right, So the 88 00:05:12,920 --> 00:05:17,040 Speaker 2: best example we had of that was the Reserve Bank 89 00:05:17,120 --> 00:05:19,880 Speaker 2: meeting before last last meeting. They cut rates the one 90 00:05:19,880 --> 00:05:24,279 Speaker 2: before they were supposed to cut rates and didn't. That's 91 00:05:24,480 --> 00:05:28,960 Speaker 2: when markets move because they say, hold on, we expected 92 00:05:29,000 --> 00:05:32,560 Speaker 2: this to happen. We thought that interest rates were going 93 00:05:32,600 --> 00:05:35,960 Speaker 2: to fall. We traded so bond yields would fall. It 94 00:05:36,040 --> 00:05:40,320 Speaker 2: didn't happen. Markets do not like that, Michael at all. 95 00:05:40,839 --> 00:05:44,320 Speaker 1: So when we were talking about it before, saying the 96 00:05:44,360 --> 00:05:48,960 Speaker 1: expectation is that the Fed will cut rates, but you 97 00:05:49,000 --> 00:05:51,520 Speaker 1: said that there's a case for why they may not 98 00:05:51,680 --> 00:05:53,440 Speaker 1: cut rates, and as part of that tied to that 99 00:05:53,480 --> 00:05:55,000 Speaker 1: inflation data out next week. 100 00:05:55,160 --> 00:05:58,719 Speaker 2: Yeah. I mean, if that inflation data shows that the 101 00:05:58,760 --> 00:06:03,240 Speaker 2: tariffs are causing US bike in inflation, well, plenty of 102 00:06:03,320 --> 00:06:09,159 Speaker 2: reason to not cut interest rates. One thing about the tariffs, 103 00:06:09,240 --> 00:06:12,719 Speaker 2: it's like a one off spike though it's not ongoing, 104 00:06:12,760 --> 00:06:17,120 Speaker 2: but it is still a spike. Also, some analysts reckon 105 00:06:17,160 --> 00:06:19,360 Speaker 2: that financial conditions in the US are pretty loose, the 106 00:06:19,400 --> 00:06:21,839 Speaker 2: economy is pretty resilient. I mean, you look at the 107 00:06:21,880 --> 00:06:27,080 Speaker 2: share market when you've got that going on, and the 108 00:06:27,200 --> 00:06:30,360 Speaker 2: lending rate at the moment, at the benchmark rate is 109 00:06:30,560 --> 00:06:36,120 Speaker 2: not particularly restrictive. Do you really need to cut interest rates? 110 00:06:37,400 --> 00:06:40,240 Speaker 2: It's sort of the reason you might do is because 111 00:06:40,240 --> 00:06:42,359 Speaker 2: Team Trump says you've got to cut interest rates, and 112 00:06:42,440 --> 00:06:46,919 Speaker 2: our Federal Reserve Chair deraon Pale has been fantastic in 113 00:06:47,000 --> 00:06:51,040 Speaker 2: standing up for the Fed, while others have fallen, I mean, 114 00:06:51,080 --> 00:06:55,000 Speaker 2: not through their own needs, but the pressure from Donald Trump. 115 00:06:55,360 --> 00:06:58,960 Speaker 2: I suppose that fear is that if jeraon Pale does 116 00:06:59,000 --> 00:07:01,239 Speaker 2: cut interest rates, and the Fed does cut interest rates, 117 00:07:01,800 --> 00:07:03,839 Speaker 2: then it's going to be sort of a bit of 118 00:07:03,839 --> 00:07:07,320 Speaker 2: a well, we're doing this for Donald Trump, so rock 119 00:07:07,360 --> 00:07:08,920 Speaker 2: in a hard place for the Fed. If it does 120 00:07:08,960 --> 00:07:11,800 Speaker 2: do it, it's going to be blamed for following Donald Trump. 121 00:07:11,840 --> 00:07:13,400 Speaker 2: If it doesn't do it, it's going to be blamed 122 00:07:13,440 --> 00:07:17,640 Speaker 2: for curbing the economy. The markets reckon there'll be a 123 00:07:17,720 --> 00:07:22,360 Speaker 2: rate cut, but it's no sure thing, definitely sure thing. 124 00:07:22,920 --> 00:07:25,280 Speaker 1: If it does. What does it mean then for Wall Street? 125 00:07:25,360 --> 00:07:28,240 Speaker 1: For share markets markets? 126 00:07:28,280 --> 00:07:32,239 Speaker 2: I mean, Wall Street's just booming, and Wall Street should 127 00:07:33,400 --> 00:07:36,960 Speaker 2: increase if it cuts rates. If it doesn't cut rates, 128 00:07:37,080 --> 00:07:39,800 Speaker 2: that makes it more interesting because Wall Street will fall 129 00:07:40,080 --> 00:07:43,600 Speaker 2: that there's been a bunch of leading investment banks over 130 00:07:43,640 --> 00:07:46,880 Speaker 2: the past couple of weeks coming out and saying historically, 131 00:07:47,440 --> 00:07:50,920 Speaker 2: Wall Street is trading a game. I'm getting a bit 132 00:07:50,920 --> 00:07:53,440 Speaker 2: technical here, but I think they're saying about twenty seven 133 00:07:53,560 --> 00:07:56,960 Speaker 2: times earnings. Normally it trains at sixteen times earnings. Don't 134 00:07:56,960 --> 00:07:59,840 Speaker 2: worry too much about what the times earnings means. Normally 135 00:08:00,040 --> 00:08:04,119 Speaker 2: at sixteen's at twenty seven, it's extremely expensive at the moment. 136 00:08:04,680 --> 00:08:09,080 Speaker 2: Any bad news as in high inflation, no interest rate 137 00:08:09,160 --> 00:08:13,360 Speaker 2: caun't you could well see a correction in Wall Street coming, 138 00:08:13,520 --> 00:08:16,920 Speaker 2: and many investment banks thinks that that will actually happen. 139 00:08:17,240 --> 00:08:20,680 Speaker 2: It's kind of the price for price to perfection. So 140 00:08:20,720 --> 00:08:23,360 Speaker 2: if things aren't perfect, there could be some troubles. 141 00:08:23,640 --> 00:08:26,960 Speaker 1: All right. I think we have comprehensively covered that, and 142 00:08:27,000 --> 00:08:28,800 Speaker 1: I love the fact that you gave. You gave so 143 00:08:29,000 --> 00:08:33,000 Speaker 1: much detail in all of that. And I contributed one 144 00:08:33,120 --> 00:08:36,079 Speaker 1: piece of information in there where I said that the 145 00:08:36,679 --> 00:08:40,360 Speaker 1: FED was meeting sixteen seventeen of September, end of next week. 146 00:08:40,480 --> 00:08:42,920 Speaker 1: It's Tuesday and Wednesday of next week. So I had 147 00:08:42,960 --> 00:08:47,040 Speaker 1: one job one job in that short but I've corrected 148 00:08:47,040 --> 00:08:49,680 Speaker 1: the record now, so everything is okay, all this weeking Heaven. 149 00:08:49,880 --> 00:08:51,680 Speaker 1: Thanks very much, Sere that we did a great job. 150 00:08:51,960 --> 00:08:54,839 Speaker 1: Thanks Michael, indeed was a joint Davitt. If you've got 151 00:08:54,840 --> 00:08:56,520 Speaker 1: something that you would like to know, then please send 152 00:08:56,559 --> 00:08:59,440 Speaker 1: through your question. We are very happy to dig into it. 153 00:08:59,520 --> 00:09:02,080 Speaker 1: Send it through you on LinkedIn, Instagram, Facebook, or at 154 00:09:02,120 --> 00:09:04,960 Speaker 1: Fearangreed dot com dot au. I'm Mark Thompson and this 155 00:09:05,080 --> 00:09:11,599 Speaker 1: is Fear and Greed Q and a H.