The Changing Winds at Sintra

Research evidence excerpt

The Changing Winds at Sintra

IdeaMallow for patience. Combined with our inflation forecast that is notably softer than

the FOMC’s median projection and the prospect that the methodological revision

for PCE inflation could materially lower inflation, we are comfortable sticking with

our view that the Fed will not hike this year.

AI also divides the US and Europe, with the capex surge clearer, earlier, and larger in

the US. And while AI is inflationary at the margin in the short run, we do not see

effects like “chipflation” as fundamentally changing our view. Arguments that AI will

be disinflationary and lead to lower policy rates should be re-examined and possibly

rejected. First, the state of the business cycle will dominate. Second, the

disinflationary effect is one of many; more productivity should also mean more

demand, both through consumption and investment spending. Finally, faster

productivity growth means higher equilibrium interest rates – r*, as economists say

– further confounding the case for rate cuts. The simple argument is almost surely

wrong.

Enjoy your Sunday.

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What I'm Reading This Week

US Economics Weekly: June employment supports patience over hikes (2 Jul 2026)

US Economics Weekly: The data road map to rate hikes (26 Jun 2026)

European Economics Weekly: Assessing the Case for a September Hike (19 Jun

2026)

Global Economic Briefing: Remember Tariffs? Catalysts Ahead (2 Jul 2026)

What We Are Watching This Week

MONDAY, JULY 06

Germany manufacturing orders: We expect some upward correction of

orders in May (1.5%M) after a broad-based decline in April (-3.8%M).

TUESDAY, JULY 07

Colombia June CPI: We expect headline at 0.27% m-o-m, driven by services,

with ongoing signs of the minimum wage increase.