Monetary
EM local bonds face near-term turbulence from rising inflation, global risk aversion, and currency weakness. Use the sell-off to build exposure: medium- and longer-term fundamentals remain favorable.
Core US inflation is still running above target. But this morning’s data revisions reveal that the gap is not nearly as large as it appeared yesterday.
The Fed is unanimous in expecting a mild tightening cycle of no more than 75 bps, but that outcome is contingent on a rapid drop in core inflation in 2027.
We remain constructive on US equities, but higher yields, slower EPS growth and heavy IPO issuance remain significant risks to valuations, leaving the path to our year-end target increasingly dependent on earnings. Tactically, there has already been a significant, but benign, compression in multiples, as earnings have outpaced prices. A well-communicated Fed hike could ease rather than intensify bond-market uncertainty.
The US Treasury department’s attempts at yield suppression are doomed to fail unless the Federal Reserve gets involved.
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.
