AI gloom revives the specter of stagflation
TLT•Souring sentiment toward AI has coincided with a retreat in Treasury yields even as energy prices rise, raising the prospect of stagflation. The 10-year yield fell 20 basis points last Thursday, while one-year market-based inflation expectations climbed to 2.80%.
1. AI concerns and Treasuries
Souring investor sentiment around AI has put the brakes on Wall Street’s rally and revived demand for US Treasuries, even as surging energy prices stoke inflation. The 10-year Treasury yield fell below 5% last Thursday for the first time in over a month, after reaching 5.36% earlier this month.
2. Energy and inflation pressures
US crude futures rose 10% last week to a six-month peak above $110 a barrel. The article says the relationship between energy prices and Treasury yields has recently broken down: oil has rebounded sharply while yields have retreated, including a 20-basis-point drop last Thursday. One-year market-based inflation expectations rose to 2.80%, their highest since June, while longer-dated inflation swap rates rose less dramatically.
3. Fed faces a difficult choice
A mix of stagnant growth and sticky inflation could complicate decisions for the Federal Open Market Committee. The article says markets expect the Fed to hold its policy rate this Wednesday and still anticipate tightening in the coming months. Producer prices are rising 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 next spring.
