The Non-Exclusive List

CPI disinflation, PCED is a mess, balance sheet accommodation, monetarism, is tech discounting decelerating AI capex?

Note: Next week’s note will likely be delayed to Monday morning due to the annual Sonnenalp Golf Club Member Guest Tournament.

In this week’s note:

· Demand headwinds from immigration, fiscal restraint, tariffs, and energy shocks are fading, while inflation data suggests fiscal and monetary conditions are not supportive of a renewed inflation acceleration. The remaining drag on the K-shaped economy is the Fed’s restrictive rate policy paired with accommodative balance-sheet policy, making September a likely starting point for policy rebalancing.

· The section argues that FOMC participants are over-relying on chain-weighted PCED inflation despite evidence that CPI is providing a cleaner read, particularly given distorted technology and seasonal-adjustment data. Recent CPI and PPI reports show broad disinflation, limited consumer-goods pricing power, and support the view that tariffs and AI-related pressures do not justify rate-policy tightening.

· Warsh’s “non-exclusive list” points to balance-sheet tools—not simply rate hikes or cuts—as the appropriate response to AI related inflation concerns. Ending reserve-management purchases and shortening SOMA duration would better address monetary accommodation and AI-driven capital demand than surprising markets with a rate hike.

· Macro conditions improved as soft CPI and PPI reports pushed yields lower, but the AI-driven equity theme weakened sharply, highlighting a divergence between policy tailwinds and micro-level market leadership. Financials remain a favored sector as bank profitability and regulatory relief improve, while higher real rates appear tied to AI capital demand, global sovereign pressures, and government interest expense risk.