03/02/25: DeepSeek's impact, Jevons Paradox & central bank moves

Monday Espresso Podcast - 3rd February 2025

[00:00:00] Nathan Sweeney: It is Monday, the 3rd of February. Today, I'm joined by Eddie Kennedy, our head of discretionary fund management here at Marlborough. So really pleased to have Eddie on the show today, Eddie. Good morning.

[00:00:10] Edward Kennedy: Good morning to you, Nathan. Great to be back on the show.

[00:00:13] Nathan Sweeney: So we're going to get some insight from Eddie about what was happening in markets last week.

[00:00:17] Nathan Sweeney: So Eddie, how did markets perform last week?

[00:00:20] Edward Kennedy: It was an interesting week, Nathan. Had a bit of volatility at the start of the week, but we're finishing with the US broadly flat. European equities up about 1%, while the UK was actually the outperformer, up 2%. Now, UK equities have done well and it's been helped by a weaker pound, lower exposure to the information technology sector, and a little bit of relief as Donald Trump's tariff is really focused more with those people closer to their own borders rather than in Europe.

[00:00:49] Nathan Sweeney: So the big news last week was around a company called DeepSeek. So what do we need to know about DeepSeek?

[00:00:54] Edward Kennedy: Yeah, sure. DeepSeek was actually founded in 2023 by Liang Wen Feng.

[00:01:00] Edward Kennedy: Who is chief of AI driven quant hedge fund called HiFlyer. Though not fully detailed in the company, the cost of developing DeepSeek's open source model appears to be only a fraction of that required by Open AI, or even Meta AI. That calls into question the need for the most powerful AI accelerators from the likes of NVIDIA, the chipmaker.

[00:01:25] Edward Kennedy: Hence why NVIDIA and other AI enablers, experienced a large drop on Monday. Now these concerns were eased over the week helped by a 19th century economist named William Stanley Jevons. Now just let me explain that. William Stanley Jevons is the creator of the Jevons Paradox, which occurs when technology advancements make resource more efficient to use.

[00:01:51] Edward Kennedy: Thereby reducing the amount needed for a single application. However, as the cost of using resources drops, overall demand increases, causing total resource consumption to rise. Therefore, the cheaper AI chips get, the more companies that adopt AI. And this paradox was even quoted by the CEO of Microsoft.

[00:02:13] Nathan Sweeney: Okay, that's quite insightful. So ultimately what we're seeing here is markets selling off because of concerns about all the spending the big tech companies have made in AI. DeepSeek is doing it cheaper, and if they can do it cheaper, everybody can do it cheaper, which means more people will ultimately start to use AI.

[00:02:31] Nathan Sweeney: So that's a very interesting paradox. Now that wasn't the only news during the week. We obviously had some central banks out last week. So what did we hear from the major central banks during the week?

[00:02:41] Edward Kennedy: Yeah, the two big central banks that really reported this week was ECB, the governing council there cut by 25 basis points to 2.75% and sent a steady message on policy outlook. The language on growth was balanced and their tone on inflation remain confident, particularly in respect to falling wage growth. Even President Lagarde suggested that the staff have downgraded their estimates and more in line with her comments of a range between 1.75 to 2.25. So expect more cuts coming from the ECB. Well the Fed, over in the US, didn't cut, they, as expected, they kept rates on hold at 4.25% to 4.5%. However, there was some changes in the statement that people thought were a little bit hawkish in nature around the labour market. And falling inflation, even though chairman, Powell down played the significance of this language change in the press conference.

[00:03:43] Edward Kennedy: So actually looking forward, we'd expect in maybe another two cuts from the Fed this year, probably the next one in June.

[00:03:52] Nathan Sweeney: Okay. So again, other interesting development there. You know, central banks in Europe and the UK as well to some extent, you know, reducing rates at a faster pace than the US. So that can mean different things for those markets.

[00:04:04] Nathan Sweeney: So what do we have to look forward to for the week ahead?

[00:04:07] Edward Kennedy: If we look at the week ahead, the focus really changes from the central bank meetings to jobs data. The US, the all important non farm payrolls will be out. And this will give us an indication on how jobs and job creation is in the US. While, in the UK it's more a focus around service and manufacturing data.

[00:04:27] Nathan Sweeney: Okay, so always something to focus on within markets. Hopefully that's given you lots of insight into what's happening on the AI front and then also from a central bank perspective. Eddie, really great to have you on the show. Some really great insight there for our audience.

[00:04:40] Nathan Sweeney: Thank you and have a great week, everybody.