Debates at our Table
This quarter, discussions among BNY’s macro and market experts focused on unpacking a widening array of emerging crosswinds shaping a volatile macroeconomic environment. Geopolitical tensions, including disruptions to energy exports from the Middle East, continue to exert upward pressure on energy prices and inflation expectations. At the same time, ongoing investments into artificial intelligence (AI) are supporting capital expenditure, productivity gains, and broader economic resilience. Our conversations dug deep into uncertainties created by these opposing forces, the investor reaction across various asset classes, global growth prospects, and our outlook for central bank policy.
We believe the U.S. economy is navigating this period of heightened uncertainty from a position of relative strength. Corporate profit buffers remain supportive, bolstering U.S. equity performance, and consumers, despite pressure on real incomes, continue to be supported by elevated net worth. Even so, the path forward remains narrow as inflation expectations stay sensitive to supply-side shocks and the broader policy environment. Globally, we view the growth backdrop as more uneven and exposed to external shocks. While global activity has remained broadly resilient, regional conditions are diverging as higher energy prices, geopolitical tensions, and persistent inflation weigh more heavily on some economies than others.
Key Takeaways
- Geopolitical Blockades and Inflation Risk: A significant disruption to global energy flows is pushing oil toward a prolonged $100 per barrel scenario. This is starting to be reflected in household and firm inflation expectations, signaling that upward price pressures may prove to be robust and increasingly interconnected with energy costs.
- The AI Productivity Offset: The economic drag from rising oil prices will be broadly neutralized by the growth impulse of AI-related investment. That offset, however, is unlikely to be evenly distributed across regions. Tech- and semiconductor-linked economies in parts of Asia, along with commodity exporters leveraged to power, infrastructure, and data center demand, may prove more resilient than energy-importing economies facing a sharper inflation shock.
- Opportunities Remain in the Front-End: While long-term U.S. bonds are challenged due to fiscal dominance, the front-end of the curve offers an attractive opportunity to earn carry while waiting for the Fed’s next move. Globally, asynchronous policy cycles, uneven disinflation, and differing fiscal dynamics argue for a selective approach to duration.
We anticipate a period of event-driven volatility until diplomatic frameworks to end the Middle East conflict and re-open the Strait of Hormuz are agreed upon and implemented. In the meantime, central banks are likely to remain reactive, with policy decisions shaped by the extent to which higher energy prices begin to feed through to broader inflation. The Fed may still have scope for cautious easing if those pressures moderate, while some peers may need to keep policy tighter for longer. Geopolitical uncertainty is likely to remain elevated, with markets adjusting to persistent volatility rather than a return to stability. In this environment, investors may continue to favor liquidity, selective cyclical exposure to commodities and AI, and a cautious approach to risk.
