AI gloom revives the specter of stagflation
TLT•Souring sentiment around AI has renewed demand for US Treasuries even as energy prices rise, raising the prospect of a stagflationary bind for the Federal Reserve. US crude futures rose 10% last week to a six-month peak above $110 a barrel, while the 10-year Treasury yield fell below 5%.
1. AI concerns and Treasury yields
Investor concerns about the vast sums being spent on AI have intensified after Big Tech earnings detailed large capital expenditure plans, while AI debt markets are wobbling. The 10-year Treasury yield fell below 5% for the first time in over a month last Thursday, despite a recent rebound in oil prices.
2. Inflation complicates Fed outlook
US crude futures rose 10% last week to a six-month peak above $110 a barrel. One-year market-based inflation expectations climbed to 2.80%, their highest since June, while longer-dated inflation swap rates rose less sharply. Producer prices are increasing at their fastest pace in four years, and consumer price inflation has been above the Fed’s 2% target for close to six years. UBS economists expect little easing in inflation before the spring of next year.
