Season 3 Episode 11:
Dawn of a new interest rate cycle with Karen Ward

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On this week’s show, we welcome Karen Ward, Chief Market Strategist EMEA at JP Morgan Asset Management. We discuss how investors should think about inflation and central bank reactions, why this rate hiking cycle might be more like that of the 2000s, and how some economic models are getting challenged.

Karen has been recognised as one of the 100 most influential women in finance

We discuss: 

  • How Karen is helping investors think about things like inflation and supply chains in the current environment.
  • Karen’s simple three-lens framework: (1) demand – what are the underlying drivers?, (2) supply – that’s the big current issue and how will it resolve?, (3) what policymakers do.
  • Conclusions – Karen is optimistic about demand, consumers, and balance sheets are looking good. Savings and house prices are up. More hesitant about supply resolving quickly. Policymakers are likely to err on the side of doing little. That gives a very supportive backdrop for growth assets.
  • Will inflation last longer than people are expecting? Some elements are transitory, eg demand for used cars. The non-transitory aspect comes from the labour market. Workers haven’t had bargaining power for a long time but that’s changing fast. Labour markets are tight. Karen’s view is inflation is not going back down to c2% anytime soon.
  • Markets are really questioning transitory narrative – partly labour story, labour force participation rates are not picking up as expected. 

  • We haven’t needed to pay attention to the supply side of the global economy for a very long time due to the overwhelming supply mainly from China for years. 

  • There is a “healthy” good level of inflation – it’s like wine or chocolate, you want the right amount not too much. More like 3% per year not 1% per year. Modest inflation represents a healthy economy, not to be worried about. 

  • Bank of England policy – Karen is on the Times’ shadow MPC committee and has argued for interest rate rises when the committee has recently maintained rates. Why? A difference in judgement in how transitory inflation is. 

  • The narrative from the central banks is changing – would rather take risks raising rates too late rather than too early. It used to be “a stitch in time saves nine”, but that’s changed. Will a later hike mean they need to do more? That’s not currently being priced. 

  • We discuss recent volatility in market rate expectations, driven by uncertainties in the economy and in how central banks will react, and how to think about the new rate tightening cycle. The key question – has the economy changed? Has the economy become more interest rate sensitive? On the household side: no, the majority of households fixed mortgages fairly long. But government cashflows are now more sensitive to interest rates, so that makes things more sensitive. Karen’s view - brace for volatility in 2022. 

  • Key data points to look out for: all about the labour market. Understanding whether these workers are really coming back to the labour market. Harder for the eurozone to really get on top of this data than in the US. Getting on top of the wage pressure and whether it’s transitory is key. 

  • Is new real-time economic activity data helping policymakers now? Can help but can catch a temporary phenomenon. 

  • Karen's biggest worries over the next 12 months.

  • The big mega themes that will define the next decade: 

    • Rise of Asia (now an investible theme as well as economic due to maturing elements of markets). Emerging markets itself changing, a lot more about quality global brands not mass-market production. 
    • Transition to Net Zero – a phenomenal shift about to happen from 80% of energy from fossil fuels down to 20%. Investment implications can’t be ignored, private capital will be (made to) drive this.  
    • Impact investing is generally a major theme – people more interested. 
  • How are economists incorporating a new understanding of sustainability into models, or are they just using the same models? It’s changing, but slowly and in niche areas, not yet in broader areas. Remains an error.

One thing to take away

Don’t use the last cycle as your template for this one. So much is different: supply side, demand backdrop. Look more at the 2000s.

The most underappreciated thing about investing

We need to pay more attention to what policymakers are telling us, their influence is greater than it’s ever been.


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