The rise in long-term US interest rates due to massive public borrowing and artificial intelligence (AI)-related expenditure could preclude the Fed from raising short-term rates further as the rise at the longer end of the yield curve is already impacting housing and rent markets, said Vincent Mortier, group CIO of France's Amundi, Europe's largest portfolio management firm. Amundi has €2.6 trillion in assets under management and is an investor in SBI Funds Management Ltd, India's largest asset management company.
Mortier expects India's strong macroeconomic fundamentals to draw back foreign investors in the likely event of a moderation in the AI earnings supercycle and oil prices due to a resolution of the West Asian and Russia-Ukraine conflicts.
When you look at the forward estimation of inflation in the US, which is sitting on a mountain of $40 trillion of public debt, it's around 2-2.2%. So the market is not buying the idea that inflation will last forever. The rates have increased quite rapidly at the short end of the curve. So I don't believe the Fed will continue to hike a lot. I think it will pause. I don't believe it (rate hike) will happen because inflation will go down on account of (higher) productivity due to AI and because persistently higher rates at the long end of the curve will put some pressure on housing and rent and do the tightening work for the Fed.
The long end of the curve has seen rates rising because of heavy public borrowing and demand by corporates for AI-related business. So you have borrowers competing and heavy supply (of bonds) expected at the longer end. This will cause the dollar to weaken and benefit emerging markets like India.
Hopefully, energy prices will go down in the next month if the Ukraine and Middle East conflicts are resolved. So, we might have pleasant surprises on inflation.