Sticky Inflation is Testing the Fed; Midterm Election Countdown

Jennifer Lawless · University of Virginia

Expects record midterm turnout, with Trump motivating voters on both sides.

Trump has proven a very motivating force for people on both sides. Midterm turnout rose in 2018, and in 2022 it was higher than in previous cycles. More than 10 million ballots have already been cast. At least a third of the country will remain disengaged, but people will show up at the polls, so Lawless bets turnout will be a record.

“midterm turnout has increased in 2018. In 2022, it was higher than in previous cycles. And my bet is that we'll see record turnout this time.”at 12:17

Jennifer Lawless · University of Virginia

Democrats would likely take the Senate by one or two seats if the election were held today.

Up to a dozen Senate seats could potentially flip, depending on which predictions and polls you weight. Democrats do not need a dozen seats. If the election were held today they would likely take back the Senate, probably not by a huge margin but by one or two seats.

“if the election was held today, they would likely take back the senate, probably not by a huge margin, but by one or two seats.”at 12:52

Jennifer Lawless · University of Virginia

Republicans' two strategies, distancing candidates and boosting turnout, are both long-shot Hail Mary passes.

Candidates in close races are distancing themselves from Trump, and Trump is allowing it more than in past cycles, as with Republican Joe Nunu in New Hampshire running an ad saying he is not Trump. The other option is to drive turnout among low-propensity MAGA voters who turned out only when Trump was on the ticket. Lawless judges both potentially smart but ultimately only options, and both long shots for Republicans.

“so I think there's this two pronged strategy, but basically, both are Hail Mary passes for the Republicans at this point.”at 13:56

Jennifer Lawless · University of Virginia

US politics is about turnout and polarization; candidates won't run to the center.

The electorate is far more moderate than the candidates it elects, but polarization means a D or R next to a name tells you almost everything. Campaigns therefore aim to drive turnout among their own supporters and win over independents, not move to the middle. Lawless expects 2028 talk to begin about forty-eight hours after the election.

“I think we've reached an era of American politics where it's all about turnout... It's not about running to the middle anymore.”at 15:53

Julia Coronado · MacroPolicy Perspectives

AI is rate-sensitive because it is the most capital-hungry sector in decades; cost of capital matters.

Coronado rejects the argument that AI is not interest-rate sensitive and so cannot be addressed by the Fed. Recent market moves show AI is rate sensitive, and it is the most capital-hungry sector in decades. The cost of capital therefore feeds into investor sentiment and sensitivity to the numbers, so the Fed's policy does reach the AI build-out.

“I think actually what we've seen in markets in the last few weeks illustrates that AI is interest rate sensitive, and of course it is because it's the most capital hungry sector we've had in decades.”at 5:22

Julia Coronado · MacroPolicy Perspectives

Inflation pressures show the AI build-out has a speed limit; capex growth will moderate.

Inflation pressures indicate there is a speed limit to the AI build-out. Consumer purchasing power is taking a hit and is being held up by wealth effects. Capex outlays and announced plans have run on a hockey-stick path, so even if growth slows the numbers will be more moderate.

“I think what the inflation pressures are telling us is that there is a speed limit to the AI build.”at 6:47

Julia Coronado · MacroPolicy Perspectives

AI build-out is the main driver of US growth, lifting hiring and consumption, with demand largely exported.

Data center build-out ripples into component suppliers, and its footprint shows up in labor data, with construction, manufacturing, transportation and warehousing adding jobs as other sectors slow. Consumption has run ahead of real income growth because of AI-led wealth effects. US GDP is still only growing around 2% during the capex boom because much of the demand is exported as chips and components, making AI a global GDP driver as well as a US one.

“You can see its footprint in the labor market. You're seeing construction hiring and manufacturing hiring and transportation and warehousing adding more jobs even as other sectors slow down. So you can see that it really is the main driver.”at 8:51

Michael Dean · Bloomberg Intelligence

European automakers must restructure, cutting another 50,000 jobs and capacity under Strategy 2030.

European automakers are going down the EV road but have to restructure. A new strategy 2030 has just been announced, and it will mean losing another 50,000 jobs and cutting capacity. Paul Sweeney adds that they will also have to reduce capacity in China, so the sector is under heavy pressure.

“going down that road, but they have to restructure. And they just announced the new strategy 2030, and they're gonna have to lose another 50,000 jobs. They're gonna have to cut capacity.”at 25:44

Michael Dean · Bloomberg Intelligence

Battery EV uptake in Europe is driven by cheap Chinese imports, not fuel prices.

Diesel at about $6 a gallon in Europe is still cheap compared with other areas, so high fuel prices are not yet the main push. Battery electric vehicle take-up is rising, but Michael Dean says that is mainly because Chinese imports are so cheap, not because of the actual fuel price. Chinese brands are a major competitive force in the European market.

“That's still pretty cheap compared to Europe. So it's starting to have an impact, and you're seeing higher take up of battery electric vehicles, but that's more because the Chinese imports are so cheap rather than the actual fuel price.”at 30:32

Damian Sassower · Bloomberg Intelligence

Copper supply is falling off a cliff; copper prices will rise into Q1 2027.

There is not much copper production, and copper supply is really falling off a cliff. Sassower expects this to be a real Q1 2027 story, with the LME copper inventory already at 14,000-plus tonnes as a backdrop. He says copper is going higher and that is what he is pricing into his models.

“copper supply really falling off a cliff. And this is going be a real Q1 twenty seven story in my opinion... It's going higher in my opinion and that's what I'm pricing into my models.”at 28:42

Damian Sassower · Bloomberg Intelligence

Aluminium is falling on Indonesian supply; prices could break below 3,000.

Aluminium is moving the other way from copper, creating a wedge in base metals. Indonesia is a huge smelter and copper and aluminium producer, and its incremental supply is what is driving the aluminium price down. Technicals look poor, so the price might break below 3,000.

“it's going in the other direction. [I] know it might break below 3,000, the technicals don't look good. And so Indonesia is obviously a huge smelter.”at 28:59

Julia Coronado · MacroPolicy Perspectives

Sticky inflation constrains Warsh's FOMC; he has signed on to a hiking cycle rather than cuts.

Before Warsh took over, the FOMC was already rethinking inflation dynamics and was increasingly worried about persistent inflation. Anyone aiming to cut or even hold rates steady would face a committee that is a very powerful constraint. Warsh read the tea leaves and, to lead the committee, signed on to basically a hiking cycle. Coronado also says the Fed does not need to crush the economy but must keep inflation in check and meet its target.

“you were confronting a committee that was increasingly worried about stickiness and inflation, persistence and inflation... So he signed on to basically a hiking cycle.”at 4:00

Julia Coronado · MacroPolicy Perspectives

Rejects arguments that structural shifts justify abandoning the 2% inflation target.

Responding to Paul Sweeney's question on whether reshoring, limits on immigration pushing up wages and AI-driven changes make 2% no longer the right target, Coronado says that kind of argument sends shivers down her spine. Once you start making excuses for inflation, price stability slips away, and the US has done this in the past. She hears rumblings of this again, including the claim that AI is not rate sensitive, which she disputes.

“Once we start making excuses for inflation, price stability starts slipping away from us. We've done it in the past.”at 5:05

Julia Coronado · MacroPolicy Perspectives

Consumer purchasing power is taking a hit, held up only by AI-driven wealth effects.

Sticky inflation and flat real wages are squeezing purchasing power. Consumption has been running ahead of real income growth, propped up by wealth effects from the AI boom rather than by income gains. That makes consumer spending vulnerable if the wealth effect fades.

“consumer purchasing power is taking a hit, and really, [consumers] are being held up by wealth effects.”at 6:56

Julia Coronado · MacroPolicy Perspectives

Some moderation in US nominal GDP growth is the baseline expectation for 2027.

Several factors could slow nominal GDP. Inflation pressures show a speed limit to the AI build-out, consumer purchasing power is taking a hit, and consumption is propped up by wealth effects. Given the hockey-stick path of capex, even if growth slows, some moderation in nominal GDP growth in the year ahead is probably the baseline expectation for 2027.

“we could see some moderation in nominal GDP growth, in the year ahead.”at 7:06

Julia Coronado · MacroPolicy Perspectives

US real wages are not growing; labor market is balanced and wage growth is not accelerating.

Coronado says real wages are not growing. The labor market is not tight but fine and very balanced, and none of the wage growth measures show wages firming or accelerating. That combination of flat real wages and sticky inflation is what squeezes consumers.

“Well, real wages are not growing. The labor market is not tight. It is fine. It is very balanced, but we do not see any indications in the wage growth... measures that wages are firming or accelerating.”at 7:35