Summary of Key Points
Subawan, the Head of Global Macroeconomics at Nomura, believes that the new chairman of the Federal Reserve (Fed), Jerome Powell, will adjust the forward guidance in his debut speech, shifting it from a bias towards interest rate cuts to a more neutral stance. The Fed's policy will also change from "two interest rate cuts this year" to "no action for an indefinite period." The world is facing a rare "triple price shock" (in energy, chips, and potential food prices), which is exacerbating the K-shaped divergence between countries and within countries. There is a trend of "mild de-dollarization," with additional funds being distributed towards non-U.S. assets. China, thanks to its energy strategy, potential in AI applications, and low valuations, has become an attractive option for global asset allocation.
1. Why Has the Fed Suddenly "Stopped Moving?"
Nomura previously predicted that the Fed would cut interest rates twice this year, but now it has changed its stance to "no rate adjustments for an indefinite period." There are three reasons for this:
1. Inflation is rising again: The situation in the Middle East has led to tensions in the oil supply chain (rising oil prices), and the AI boom has caused a shortage of global chip production capacity (increasing chip prices), both of which have pushed up consumer prices. Nomura expects the U.S. core PCE inflation rate to reach 3.2% by the end of the year, far exceeding the Fed's target of 2%.
2. Employment data is too good: In May, the U.S. added 172,000 jobs, more than twice the market's expectation of 85,000, and the unemployment rate remained stable at 4.3%, indicating strong economic resilience and no need for interest rate cuts to stimulate the economy.
3. Political pressure has decreased: Trump's recent statements have given the Fed more independence, reducing the pressure for it to cut rates in the short term.
Therefore, even if Powell wants to cut rates, he may not be able to convince the other members of the committee, so they will have to wait and see.
2. Why Has the Fed Become "More Difficult to Predict?"
Powell will change two key rules upon taking office:
1. Forward guidance will become more neutral: The Fed used to hint that it might cut rates in the future; now it will state that it could either raise or cut rates, depending on inflation and growth conditions—meaning there is no clear direction.
2. Reducing reliance on current data and focusing on future forecasts: Powell wants the Fed to pay less attention to current employment and price trends and focus more on predicting situations 6-12 months ahead (such as whether AI will boost productivity and reduce inflation). The Fed may also eliminate the "dot plot" (officials' forecasts for future interest rates).
This makes it harder for the market to predict the Fed's actions, leading to greater fluctuations in interest rates. For example, if the market used to know that the Fed was going to cut rates, now investors can only "bet" on future developments, which increases the risk of errors.
3. The World Is Facing a "Triple Price Shock"—Who Will Be Most Affected?
Subawan warns that the world may encounter three types of price increases:
1. Energy shock: Conflicts in the Middle East are driving up oil prices, affecting industries that rely on oil (such as transportation and chemicals).
2. Chip shock: The AI boom has led to a surge in chip demand, outpacing production capacity, causing price increases in electronics and automobiles.
3. Potential food shock: If El Niño is severe, it could affect food production and drive up food prices.
These three shocks will exacerbate economic divergence:
- Countries that will benefit: The U.S. (a hub for AI), China (with AI applications and energy reserves), and South Korea (in the chip industry) have strong economies and are less likely to experience stagflation.
- Countries that will be affected: Europe, Canada, and some Southeast Asian countries (which do not benefit from AI and are impacted by rising energy and food prices) may face stagflation (economies that do not grow but experience rising prices).
This divergence is also evident domestically: the poor will spend more on food and gasoline, while the wealthy will see their wealth increase through asset appreciation (such as stocks), widening the wealth gap.
4. What Does "Mild De-Dollarization" Mean?
It does not mean that people are selling all their dollar assets; rather, it means that additional funds will be distributed to other places:
- The U.S., being at the center of the AI revolution, will still attract foreign investment, so the dollar will not decline significantly.
- However, investors will invest their new earnings in markets such as Australia and Europe, rather than solely in U.S. assets.
For example, if you used to invest all your profits in U.S. stocks, you might now allocate some of them to European stocks or Australian currency assets. This is a form of "mild de-dollarization"—the dollar's dominant position will not change, but its share will gradually decrease.
5. Why Have Chinese Assets Become So Attractive?
Subawan is very optimistic about China's investment prospects for three reasons:
1. Strong resilience to shocks: China has already made strategic reserves in energy and is transitioning to new energy sources (such as electric vehicles), so it is not vulnerable to rising energy prices. Its industrial chain is rapidly upgrading (electric vehicles, robots), and its exports are stable.
2. Great potential for AI applications: China has a strong manufacturing base (many robots) and can quickly implement AI technology in factories to boost productivity and address issues like an aging population.
3. Low valuations: Chinese assets (such as stocks) are much cheaper than U.S. assets, making them a more cost-effective option for global diversification.
In short, China can withstand external shocks, seize the opportunities presented by AI, and has attractive prices, making it an excellent choice for global investors.
Conclusion
The Fed's policy is becoming more difficult to predict, and the world is facing triple price shocks. However, China, with its unique advantages, has become a safe haven for asset allocation in this divided global economy. Understanding these trends will help individuals better understand the direction of the global economy.