07/04/26: Middle East, US job numbers & interest rates

In this week's episode of the Monday Espresso podcast, the team discuss recent events and look to the week ahead.

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Monday Espresso Podcast – 7th April 2026

[00:00:00] Rory Dowie: Good morning. Today is Tuesday, the 7th of April. Hope you all had nice long weekends.

[00:00:04] Rory Dowie: The Tuesday Espresso Podcast doesn't quite have the same ring to it, but something that does. James Athey, Bond Fund Manager. James, good morning.

[00:00:13] James Athey: What an intro, thank you, Rory, good to be back.

[00:00:16] Rory Dowie: Lots to talk about today, but we're going to touch on obviously what's going on in the Middle East, we also had US job numbers that came out at the end of last week, so we'll be discussing what that might mean for the pathway of interest rates.

[00:00:26] Rory Dowie: Clearly, we're in a bit of a difficult situation given some of the inflationary pressures that are coming out of the Middle East, and then obviously we're gonna talk a little bit about what that might mean for the potential pathway of rate cuts.

[00:00:37] Rory Dowie: The market's been swinging about on every rumour and news headline it seems, James, and we're approaching Trump's deadline this evening, of 8:00 PM Eastern Time.

[00:00:45] Rory Dowie: From your perspective, what's kind of the latest in the Middle East?

[00:00:49] James Athey: Yeah, I mean, you've pretty much nailed it, Rory. It's, volatility is the name of the game.

[00:00:54] James Athey: We've kind of got used to this in markets in recent years where it's very headline driven, partly because investors are, quite short term, partly because you actually have machines investing on behalf of people, which will quickly interpret headlines and place trades.

[00:01:10] James Athey: The reality is that we're not really any clearer on what's happening, why it's happening, and when it might end, in terms of the war in the Middle East. And of course the inflationary impact is really yet to be felt, and that's still a big unknown as well.

[00:01:25] James Athey: So yeah, lots of headlines, lots of volatility, not a lot of clarity.

[00:01:30] Rory Dowie: Yeah, so I guess you mentioned it there, James, inflationary pressures. I think that's probably been the main discussion point across the, investment community, what that might mean for the future pathway of rate cuts. I guess, could you just give our listeners a little bit of colour?

[00:01:44] Rory Dowie: We've seen the oil price rise quite substantially, and it's sustained above sort of a hundred dollars over the last couple of weeks. What might that mean for inflation, firstly, and secondly, what could that mean for the future pathway of rate cuts?

[00:01:57] Rory Dowie: What would Central banks be looking for in the data that might concern them?

[00:02:01] James Athey: That is the big question, certainly for we bond investors, that's very much everything that we're trying to understand and assess at the minute.

[00:02:09] James Athey: So the easy thing, the easy interpretation as you have just laid out there, is higher oil prices, higher gas prices, which is particularly relevant in Europe and the UK.

[00:02:21] James Athey: But also some fertiliser prices, various other commodities are all increasing in price, have all increased a lot in price. That is quite clearly going to push up inflation.

[00:02:32] James Athey: So headline inflation is set to go higher, just about everywhere. And of course, central banks in the modern age are inflation targeters.

[00:02:41] James Athey: That means that at the core of their mandate is the requirement to keep prices stable. Generally, that means shooting for inflation around 2%.

[00:02:54] James Athey: The problem that central bankers have is that that rise in inflation is also very likely to depress growth.

[00:03:02] James Athey: So you have these conflicting inputs into a central bank's reaction function. So how central banks consider data and set policy.

[00:03:13] James Athey: Higher inflation suggests they should hike interest rates, but lower expected growth would usually result in them lowering interest rates that push and pull in central banking communities is going to be at the very heart of the market's conversation over the coming months.

[00:03:35] James Athey: For what it's worth, our interpretation is that central banks should try very hard not to respond to this inflation shock with higher interest rates. Why do we say that? Well, because we think that underlying economic conditions, and particularly when we say that we're talking about the labour market, the jobs market, we think those underlying conditions are not very strong at the minute.

[00:04:05] James Athey: And particularly the softening in labour markets we've seen in recent months is unlikely to see wage negotiations shooting higher in the way that we saw them do so in 2022.

[00:04:20] James Athey: So if you have a rise in prices and you don't have a rise in wages, that's really gonna hurt consumers and for central banks to double down on that pain by hiking interest rates, when the underlying cause of that inflation is something that central banks can do very little about i.e. oil prices and disruption in the Middle East, would simply make the economic situation worse.

[00:04:46] James Athey: So we like to think that central banks will hold steady rather than hike rates, but it remains very uncertain.

[00:04:53] Rory Dowie: Very clear, James, we're really stuck between a rock and a hard place to kind of summarise.

[00:04:58] Rory Dowie: It's almost like you read my mind that's led us nicely into the US jobs numbers. So that's the kind of latest reading on the labour market in the US that was released last Friday. James, what can you tell us, our listeners there?

[00:05:09] James Athey: Yeah, so generally speaking, the most watched single economic statistic in markets is that US labour market report, often called non-farm payrolls report that we always get the first Friday of each month, so as you say, that was last Friday.

[00:05:25] James Athey: A positive surprise, so a larger number of jobs being added during the month than was expected by markets.

[00:05:32] James Athey: On the face of it, of course, that's a positive. The challenge right now obviously, is that markets really are so focused on the war in the Middle East and what that means for inflation and growth in the labour market in the future, that this print sort of pointing at a period prior to the war really doesn't carry as much significance as it would normally.

[00:05:55] James Athey: So, you had a large number of jobs added larger than the market expected, but I think really investors were very quick to look past that because there's such significant change ongoing at the minute.

[00:06:09] Rory Dowie: So I guess investors are basically discounting that print and they'll be looking to future data points where we basically have the impacts and decisions when the war's been ongoing, when you know businesses have been understanding the potential inflationary impacts, what that does on the cost line, and then, flowing through then to kind of decisions around workers and wage rises, et cetera.

[00:06:28] Rory Dowie: I guess putting that all together as of today, what is the market expecting in terms of rate cuts or rate rises this year? What's priced in?

[00:06:37] James Athey: Yes, so there's a decent amount of divergence, that was true even before the war in Iran started. So, the US and the UK, because a lot of our listeners will be based in the UK, so that's significant, and of course the US, the world's largest economy, the Federal Reserve, the most important central bank for financial markets.

[00:06:56] James Athey: So let's just focus on those two, in both cases, in both the US and the UK, the market was expecting rate cuts prior to this situation in the Middle East erupting. That has changed quite significantly.

[00:07:10] James Athey: In the UK the market is now pricing rate hikes. By December, where previously around two 25 basis point interest rate cuts were priced, we now have two 25 basis point rate increases, so around a hundred basis points, so a full percentage point change in the market expected interest rate at the end of this year.

[00:07:34] James Athey: In the US the move is less pronounced with good reason. The US is the world's largest oil producer. It has a huge domestic production of natural gas as well, and so it's energy independent. It's actually an energy exporter and therefore the economy in its entirety will suffer less, relative to an economy like the UK where we have significant energy importing needs.

[00:08:00] James Athey: So the rate repricing in the US is less aggressive, we've moved from pricing two cuts to pricing, no change now, so markets roughly pricing, interest rates to remain where they are through the end of this year.

[00:08:14] Rory Dowie: Brilliant James, that's very clear. For our listeners, just keeping an eye on time this week, we have a few data points coming out. We have inflation in the US and some other macro data across the Europe and UK, so we'll give you an update on that next week.

[00:08:25] Rory Dowie: James, thank you very much for joining.

[00:08:27] James Athey: Pleasure Rory.

[00:08:28] Rory Dowie: Listeners, thank you for tuning in and as always, wishing you a great week ahead.