Investment bulletin weekly week 33

AI leadership returns as Fed fears recede ___________

Vis Nayar The limited second-round impact so far from the Iran war has led to a Chief Investment Officer moderation of US July inflation. Both consumer and producer price inflation Eastspring Investments slowed, with core CPI and core PPI at 2.5% and 4.2% YoY, respectively. While inflation remains elevated, the direction of travel has reduced concerns about the Ray Farris need for an imminent rate hike. At the time of writing, rate markets have reduced Chief Economist the implied probability of a September Federal Open Market Committee (FOMC) Eastspring Investments rate hike to 29%, down from more than 72% following the hawkish hold at the July FOMC meeting. In addition, markets are no longer fully pricing in a rate hike Viola Wang before year-end. Economist Eastspring Investments Meanwhile, persistent fiscal concerns continue to drive term premium higher, contributing to a steepening of the Treasury curve. If long-end yields continue to rise and inflation does not re-accelerate meaningfully, the resulting tightening in financial conditions could allow policymakers to remain on hold for longer. Nevertheless, we remain vigilant to the risk of renewed inflation pressures stemming from the conflict in the Middle East and note that underlying inflation remains meaningfully above target.

For Asia, the decline in Fed tightening expectations was first reflected in a relief rally across Asian currencies amid a weaker US dollar. Together with the fading impact of higher energy prices following the Iran war, which has contributed to lower-than-expected inflation prints across much of the region in June and July, this has eased pressure on Asian central banks to tighten policy aggressively over a short window. However, inflation risks remain highly relevant, particularly for

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economies with a heavy reliance on energy imports, while El Niño-related food price pressures could add further to headline inflation in 2027. As highlighted in last week's commentary, we continue to expect most central banks in the region to either remain in or move further into a tightening cycle over the coming quarters, with the notable exceptions of China and Thailand.

The combination of a less hawkish rates outlook and stronger-than-expected earnings has shifted market leadership back towards growth. US Q2 earning results were exceptionally strong, with more than 4/5 of S&P 500 companies beating earnings per share estimates and aggregate earnings growth running at the fastest pace since 2021. Continued upward revisions to Artificial Intelligence (AI) infrastructure spending plans from major hyperscalers further strengthened the case for sustained earnings momentum across the AI ecosystem. As a result, investors have increasingly rotated back into AI beneficiaries, with growth stocks once again outperforming both the broader market and cyclical sectors.