Torsten Slok: The economy is running pretty hot

Torsten Slok argues the US economy is 'running pretty hot' with strong employment and inflation above 2%. He sees broadening inflation pressures from energy, tariffs, and AI-driven capex (data centers, chips, labor). The Fed will hold rates but needs flexibility. He warns software is hit by a 'double whammy' of AI disruption risk and high debt/low coverage ratios, making it vulnerable in a higher-for-longer rate environment.

implicit

implicit

inferred

software (large-cap software sector) cautious down

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Torsten Slok 9.5

Torsten Slok: The economy is running pretty hot

US rates; US 10y; DXY

dxy

A strong US economy and higher-for-longer rates typically support the dollar. Slok's narrative of economic strength and persistent inflation implies USD strength.

metals

No direct mention of metals. Given the strong economy and higher-for-longer rates, metals are likely rangebound without a clear directional catalyst from this interview.

ndx

Slok highlights that software (a major NDX component) faces a 'double whammy' of AI disruption and high debt/low coverage ratios in a higher-for-longer rate environment, implying downside risk for tech-heavy indices.

rut

No direct mention of small caps. The strong economy supports RUT, but higher rates and potential recession risks from a hawkish Fed create offsetting pressures. Likely rangebound.

wti

Slok references the Iran deal and potential for 'a lot lower oil prices' as a reason the Fed needs flexibility, implying a near-term bearish view on WTI.

yields

Slok argues the economy is strong, inflation is above target and broadening, and the Fed needs flexibility. This implies upward pressure on yields as the Fed keeps rates higher for longer.

Financial conditions remain loose despite Fed hawkishness; tokenized products reflect this liquidity moment.

Morgan
Torsten Slok

The economy is strong with 4% headline inflation and 3% core inflation, well above the Fed's 2% target. Financial markets are red hot, so the Fed will not change rates today but communication is complicated.

The dual mandate shows the economy running hot on both employment and inflation, making the rate decision simple but the forward guidance challenging.
Would a pullback in Fed communication be better to avoid boxing themselves in?

Morgan
Torsten Slok

The dot plot anchors expectations but reduces flexibility. The Iran deal and potential lower oil prices show why the Fed needs flexibility. Kevin Walsh will likely avoid promising much and emphasize data dependence.

The trade-off is between anchored expectations and operational flexibility; current conditions (Iran deal) justify the latter.
Assuming a reopening of the Strait of Hormuz, has US inflation potentially peaked?

Morgan
Torsten Slok

Inflation pressures are broadening beyond energy: delayed tariff effects, AI-driven data center buildout (1% of GDP, half of growth) pushing up wages in chips, construction, and equipment. This creates broader upward pressure on inflation, not just from oil.

The AI boom accounts for roughly 0.5 percentage points of GDP growth, and its wage effects are spreading across multiple sectors.
Software is being hit by AI disruption and elevated rates.

Morgan
Torsten Slok

Software faces a 'double whammy': AI disruption questions terminal values, and higher-for-longer rates hurt sectors with high leverage and low coverage ratios. Software stands out for having a lot of debt and poor debt-servicing ability, creating significant headwinds.

The combination of AI disruption risk and high debt/low coverage ratios makes software particularly vulnerable in the current environment.

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