Transcript: Why markets had a stellar November

This is an audio transcript of the FT News Briefing podcast episode: ‘Why markets had a stellar November’

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Marc Filippino
Good morning from the Financial Times. Today is Friday, December 1st. And this is your FT News Briefing. 

Russian oil sanctions could be here to stay. And the FT’s Nicholas Megaw explains how investors are using artificial intelligence to decode what CEOs are saying during earnings calls. Plus, markets are banking on interest rate cuts sooner rather than later. 

Katie Martin
You know, yes, interest rate cuts might sound fantastic, but really deep recessions don’t sound super fantastic. 

Marc Filippino
I’m Marc Filippino, and here’s the news you need to start your day.

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The US wants to cut Russia’s oil and gas revenues in half by the end of the decade. That’s what top US energy diplomat Geoffrey Pyatt told the FT. Pyatt said the west should keep sanctions in place for a lot longer. That would theoretically make it harder for Russia to invade another one of its neighbours. Now, even with the sanctions, Russia is still exporting a lot of oil. It’s been able to get around a western price cap. But the International Energy Agency says if the west keeps up its sanctions Pyatt’s goal could be a reality. 

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Markets have been pretty volatile this year. Equities around the world have been up and down, and government bonds, especially in the US, have taken a real beating. But when the calendar turned to November, everything changed. The S&P 500 ended last month nearly 9 per cent higher, and US Treasuries had their best month since, well, since leg warmers were in fashion. Here to talk about why November was such a totally stellar month is the FT’s markets editor, Katie Martin. Hey, Katie. 

Katie Martin
Hey, how you doing? 

Marc Filippino
So, Katie, why were investors so confident in November? 

Katie Martin
Yeah, it’s been a, it’s been a funny old month. (Laughter)

Marc Filippino
It sure has.

Katie Martin
Yeah. I mean, really, what kind of fired people up in November was a set of payrolls data from the States, which showed that the pace at which the US economy is adding jobs has slowed down quite markedly. And this has really encouraged investors who’ve been sitting around all year thinking, are we there yet, are we there yet? As the Federal Reserve finished raising rates, it’s finally given people enough confidence to think, hmm, maybe they actually have finished raising rates. And the mood music from the Fed itself has been, yeah, you know, we’re gonna tread a little bit more carefully now. We’ve been very aggressive. We’ve raised interest rates really hard, really fast. Maybe it’s time to sit back and take stock. And for markets, this just changes everything. 

Marc Filippino
Yeah, and something I found really interesting, Katie, is that some members of the Fed, they’re being even more explicit about what they think about interest rates. 

Katie Martin
Yes. So just the other day, we had some comments from Christopher Waller who is a hawkish member of the Federal Reserve. And he was saying, if we continue to see this disinflation, then, you know, potentially, even if we’re not right back down to the Fed’s sort of 2 per cent target, maybe there will be scope to start lowering rates. And it’s like, wait, what, the hawks are saying this now? Now this is not the sort of comment that the Fed starts chucking out there if it feels like the market is going too fast or is going in the wrong direction. So that’s quite significant that the Fed is saying, as you were, you know, carry on, no objection from us if you want to price in, you know, quite aggressive interest rate cuts. 

Marc Filippino
Yeah, but still, Katie, there have been cracks in the global economy caused by higher interest rates. I mean, are investors maybe unfurling the mission accomplished banner too soon? Because, yeah, interest rates may drop, but even if they do, it doesn’t mean we’re clear of a recession yet, right? 

Katie Martin
So one of the things that’s worth bearing in mind is: if we do get to the point where the Fed is cutting interest rates sooner than you might previously have anticipated, that kind of sounds good from the point of view that higher interest rates generally hurt stock markets and push up bond yields. So it sounds good the Fed, you know, starts cutting again. But think about why would it start cutting sooner. It would only start cutting sooner than you previously anticipated if inflation is still running above target, if something terrible happens. 

Marc Filippino
Right. Right. This is the parachute. And you only use the parachute if you’re falling out of the plane. 

Katie Martin
(Laughter) Yeah, exactly. You got to think about . . . be careful what you wish for. You know? Yes, interest rate cuts might sound fantastic, but really deep recessions don’t sound super fantastic, to me, anyway. So you have to be a little bit careful kind of what the framework is here. Right now, the market thinks that the Fed is going to achieve the impossible. It’s going to achieve this soft landing. And yeah, look, that could be overly optimistic. I don’t know. You don’t know. Nobody in the market knows. But it wouldn’t be the first time that the market has got this stuff wrong. 

Marc Filippino
Katie Martin is the FT’s markets editor. Thank you, Katie. 

Katie Martin
My pleasure. 

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Marc Filippino
When the chair of the Federal Reserve speaks, investors everywhere pay attention. 

Jay Powell voice clip
If it becomes appropriate to tighten policy further, we will not hesitate to do so. 

Marc Filippino
Take that line from Fed chair Jay Powell. He was speaking at a research conference recently. 

David Pope
That statement conveyed enormous confidence. We measured a strong intensity. The speech rate picked up. And so I think we need to take Fed chair Powell at his word. 

Marc Filippino
David Pope, the chief data scientist at Speech Craft Analytics, is doing more than just analysing Powell’s words with his own ears. He’s actually using artificial intelligence. And while that’s handy, what happens when this AI technology is used on chief executives and it starts to change investor strategy?

Here to explain is the FT’s Nicholas Megaw. He covers capital markets. So, Nick, what exactly is Pope doing with Jay Powell’s remarks here? 

Nicholas Megaw
So in a sense, he’s kind of doing what humans do whenever they talk to someone. You don’t just listen to the words, but you listen to the tone of voice and tell if someone is getting annoyed at you, or if they’re really enthusiastic versus if they’re just kind of like slowly reading out and sounding bored. The difference is they’re trying to do this in a much more systematic way using AI. 

David Pope
So marrying the words that executives speak with their voice tone provides a much richer, deeper insight. 

Nicholas Megaw
The way Dave explained it was they really break a recording down into kind of its constituent parts. 

David Pope
So first of all, what we do is we look for where the words and the voice tone are in alignment. So maybe the executive is optimistic in his voice. Her voice is equally optimistic. 

Nicholas Megaw
And we’ll pick up kind of tiny changes in pitch or tone that might not be obvious or even audible at all to a normal person just listening. 

David Pope
More interestingly is when there’s a divergence between the words that are spoken and the voice tone, and that reveals that perhaps the executives doesn’t actually believe the meaning of the words they’re speaking. 

Marc Filippino
OK. So, Nick, where are we starting to see this AI technology being used? Like, how is Dave using it? 

Nicholas Megaw
In theory, you could apply it for any type of recording. It’d be especially useful in situations where you will have multiple examples from the same person over time. And so that makes it particularly useful for, say, company managements who speak at the quarterly earnings calls plus industry conferences and presentations and so on. 

David Pope
So we create a baseline for each speaker and then we look for deviations from that baseline. 

Nicholas Megaw
Dave had a nice example where he looked at an earnings call from earlier this year from Illumina, which is a healthcare company that mainly does gene sequencing. But it’d been under a lot of pressure over an acquisition that it had done a couple of years previously — Grail.

David Pope
The voice tone of the CEO deSouza was quite shaky, but really sort of went off the rails when the topic of discussion turned to the Grail regulatory process. 

Francis deSouza voice clip
In terms of Grail, so, you know, the path to divestiture is, is, is . . . (inaudible) answer your question . . . 

Nicholas Megaw
The overall company Illumina was having regulatory issues from competition authorities. And it was also under pressure from activist investors. 

David Pope
And the nervousness reached a heightened peak around that topic. 

Nicholas Megaw
His answers, if you just stuck to the words, were fairly positive. But every time that topic came up, when you look at the actual audio of it, the pace changes, the pitch changes. There’s even at one point an audible gulp. 

Francis deSouza voice clip
We expect to get decisions around the two most important (pause) appeals in that timeframe. 

Nicholas Megaw
So about a couple of months after, deSouza resigned. 

Marc Filippino
I see. So if I’m an investor and I see the AI picking up on that nervousness in Francis deSouza’s voice, I might say, hey, that makes me nervous. I might sell my shares. That’s super interesting. So Nick, do you think that people will start doing that on a wider scale — making investment decisions based off of AI? 

Nicholas Megaw
I think it’s certainly part of a future. I mean, it’s at an early stage still. But there’ve been a bunch of studies that have shown it seems to help add to investment returns. And there’s some seriously big funds starting to add it into their models, especially because the previous stage of this was just kind of using algorithms to go through the text. The companies have started to con on to that and kind of game the algos by choosing their words carefully. It’s much harder to game the audio. And so that will be seen as kind of a valuable addition. 

Marc Filippino
So what kind of risks are we looking at if AI plays a bigger role in these investment decisions? 

Nicholas Megaw
I would say, broadly, there’s two types of risk. There’s a risk for investors are just misinterpreting the messages. These conclusions are based mainly on the way native speakers talk, and you don’t want as an investor to be trying to listen to a recording, running through an algorithm that says this guy is very nervous, so therefore I’m gonna short the company, when in fact he’s just speaking a second or third language and was trying to remember a translation. And secondly, there’s kind of ethical risks, as with a lot of AI. Precisely because audio can be a richer source than text, it can bring up more potential for biases. And there’s lots of issues around gender or class and stuff that can be flattened in text, but it comes out more clearly in audio. 

Marc Filippino
Nick Megaw is a capital markets reporter for the FT. Thanks, Nick. 

Nicholas Megaw
Thanks. 

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Marc Filippino
You can read more on all of these stories at FT.com for free when you click the links in our show notes. This has been your daily FT News Briefing. Make sure you check back next week for the latest business news.

The FT News Briefing is produced by Kasia Broussalian, Sonja Hutson, Fiona Symon and me, Marc Filippino. Our engineer is Monica Lopez. We had help this week from David da Silva, Michael Lello, Peter Barber and Gavin Kallmann. Our executive producer is Topher Forhecz. Cheryl Brumley is the FT’s global head of audio. And our theme song is by Metaphor Music. 

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