Uh, maybe you can give us, uh, your insights in how you came to this conclusion and where you think we're going from here.

Yeah.

Thank you, Megan.

So first of all, if I pick up on where George left off, obviously there is a broader problem that sits in France, in particular in the political issue and in the, in the French issue, and that won't go away.

So, and, you know, that in itself, uh, is obviously concerning.

However, I would field two arguments, or we fielded two additional arguments, um, that apply more broadly, and one is macro and one is very market specific.

So the macro one has something to do with the level of interest rates relative to the level of growth rates.

Uh, maybe Peter, you can share your thoughts on this.

Any indications whether we might see them or not? And, you know, what are the next, uh, things that you're watching?

Yeah, it's an excellent question.

Let me just, for the listeners, um, remind everyone that what both of these central banks are really, really guiding the market over the medium term is that what they're really worried about is that the current inflation that we're seeing that comes out of the energy complex doesn't stay in the energy complex, that it leads to higher wages, and that higher wages then ultimately lead to stronger consumption and higher prices, and it, it just spreads and percolates.

Um, and what they both are saying is that at the moment there are no indications whatsoever, um, of those materializing.

Now, I think that is true, but it's also a bit myopic.

Um, and what I mean with that is, like the way wage negotiations work, particularly on the continent of Europe, is that you have very long-dated contracts between employer and employee organizations, um, unions and employer organizations, that can last up to three years.

And they only come due at certain periods in time, and then the demands are being put on the table and then the negotiations start, and so on and so on.

Now, now that's a topic, you know, that we've not heard about, uh, for many years, and I guess why now?

The U.S. has done a couple of things recently, one, with that yen intervention, two, with that doubling of the buyback at the long end as well, that look to me, to this untrained eye, well, as I say untrained, I was trading bond products first of all in 1995, so I may be a little bit experienced, but the fact of the matter is it's looked a little bit panicky to me about the longer-term status of that reserve currency and the appetite for U.S. longer paper.

Well, I think you're not wrong there at all.

So first of all, we've been born bearish for quite a while and we've been saying that to our clients very clearly.

So being short duration has worked out all this year.

Secondly, however, I mean, when you look at how the market has performed globally, I think you're right.

And that's what I was alluding to earlier.

The U.S. bond market should have performed much worse, relatively speaking.

But ultimately, if China wanted to retaliate, its holding of U.S. treasuries could potentially be weaponized, couldn't it, to push U.S.

So given that the forecasts and the scenario sound more interesting than the decision itself, kind of what was the main points you thought was worth flagging from them?

Yeah.

So, I mean, first of all, when you look at the staff forecast, so every quarter they update the staff forecasts, they increased both on headline and core the inflation forecasts by quite a bit, actually.

So even on core, we now have in 26 and in 27 levels that are probably not compatible with the ECB's target.

And also the growth revisions to the downside were much smaller than we were expecting.

Like, for instance, for this year, they were only reduced by 0.1. We thought that would probably be reduced by 0.3. And the guard was making a point that the economy is fairly resilient and will resume growing next year and the year thereafter.

So that alone sort of leaves you with a bit of a hawkish taste.

Are you sticking with that?

So how are the ECB and BOE thinking around the situation as compared to the Fed?

Yeah, thanks, Blake.

Um, let me, let me take the first part of the question first.

Yes, there was a lot of angst, and I think the, the reason for that in my mind has many, uh, origins.

So the first one is we're, we're net energy importer, so anytime energy prices go up, that's a negative terms of trade shock for us.

That's bad.

Secondly, I mean, it's not too long ago that we had a significant price shock, um, in the form of the Ukraine war, um, that, uh, you know, is lingering in the background for sure.

Uh, can you summarize what you're thinking here?

Or to put that another way, is this déjà vu all over again? So Peter, let's start with you, um, and a very warm welcome back to, uh, twenty twenty-two.

Yeah.

Thank you, Cathal.

Um, well I guess, uh, y-you gave me free rein here, so, um, let me, let me maybe talk you through my thoughts of what is similar and what is quite different to twenty twenty-two.

So obviously, um, we have some kind of a conflict that's similar.

Um, we have a significant spike in oil and gas prices, um, that's similar, although the magnitude is different.

Um, it, it isn't as severe yet as it was in twenty twenty-two.

Kinda, you know, how do we think the ECB's reaction function will be affected by this? Or is it too early to say?

And in terms of France, is it at this point seen as a largely French story? Is it contained to the French market? Or are strategists extrapolating to broader Europe and it has become a deterrent to investing in the broader region?

I think it's probably on that scale, yes, because at the end of the day, you need big markets to invest big money.

But when you look at the pricing in the market, it's predominantly a French story and it's contained there.

Again, if I go back to the fixed income market, for instance, what you have seen is you've seen a pretty idiosyncratic move in let's say, French OATs or specifically French OATs relative to other sovereigns, but also relative to, let's say, French corporates.

But what we haven't seen, for instance, and I think you mentioned it earlier, is European equity markets, for instance, particularly the bigger ones, they still have performed.

So it's not necessarily that this is completely taking away from the investability, but specifically makes it hard to invest in France at the moment.

If the Fed does follow through with more rate cuts next year, what do you think that means for the ECB and where they stand on current rates?

Yeah, so I think you're right.