Monetary
An acute shortage of AI hardware will support tech stocks into year-end. However, AI companies may need to ultimately generate $10 trillion per year in revenue to justify their capex. Barring a massive increase in productivity growth, this will be very difficult to achieve. Despite today’s Treasury announcement of upsized buyback operations, bond yields are likely to remain elevated over the coming months. Rising crack spreads have reduced the demand for crude, which is not encouraging for global growth. On the FX front, recent intervention to support the yen will probably be insufficient, but there is significant long-term upside for the currency.
Despite today’s hold, the bar for a rate hike in September remains low and contingent on the next two core CPI reports.
We discuss what recommendations to expect from the Fed’s balance sheet task force. We conclude that any future balance sheet consolidation will be smaller than many anticipate.
May CPI data show no evidence of passthrough from energy prices to core inflation. This will keep the Fed on hold for the time being.
The AI boom will increase inflation in the near term and could also raise it over the long term. The Fed’s reluctance to hike rates is understandable, but it risks amplifying what may already be a brewing stock market bubble.
FOMC participants are coalescing around the idea that the funds rate will stay on hold for some time, an outcome that is now well priced in the bond market and that will not materially change under a new Fed Chair.