Narrative shift

The inflation narrative keeps shifting. After witnessing inflation pressures post COVID monetary and fiscal stimuli, central banks in the world tightened their balance sheets and pushed inflation down to current 2-3% range. Then 2 years ago, central banks stayed to cut rates, with the notable exceptions of Japan, Taiwan and Brazil. And now, the differences between highly indebted nations, the developed world, and the moderately ones, the emerging economies (and where do we put China in that classification matters a lot), seem to be decoupling. The Fed finalized yesterday the QT program, whereby its balance sheet has been reduced by $2.2Tn, and it looks ready not only to lower interest rates next week, but perhaps to give a hand to the U.S. treasury and buy some T-bills (not QE according the them because there is no duration) and down the road, some long term bonds (to be seen, but likely). The commodity producing countries, mostly EM, seem to be comfortable with their debt, their growth and their inflation. Perhaps the only big unknown is what will be the impact of AI and when will it hit the global ecosystem. So far, it looks like the technology will be deflationary, but it’s not clear what the impact of the debt associated with its infrastructure will bring.

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