Reactions from Three Significant Conversations Around the Globe

Jeffrey Roach [0:00] What if the biggest economic story of this decade isn't inflation, interest rates, or even geopolitics? What if it's the technology quietly changing all three? Today we're going to connect three public statements from three very different voices. The co-founder of Anthropic, the chair of the Federal Open Market Committee, and the president of France. One is helping build the technology. One is responsible for navigating the potential consequences for the world's largest economy, and one is thinking about what it means for a major economy competing in a rapidly changing world.

So putting these three perspectives together, you get a fascinating question for investors. Could AI become the productivity shock that defines the 2020s? So we're going to do three different clips, and okay, let's listen in on this first clip.

Jack Clark, Co-Founder and Head of Public Benefit, Anthropic [0:55] Which we generally like because it reduces the dependency on specific vendors. Yeah. So we work with some of the world's largest enterprises and many of the world's most successful startups. And I think the common thing is being willing to do creative destruction, being willing from the top of an organization to tear down and completely rebuild parts of yourself with this technology, which gets harder the bigger the organization gets. So

Richard Quest, CNN Presenter [1:20] You used this phrase creative destruction. Yes. He nearly had a heart attack when he said it as a central banker. What does

Jack Clark, Co-Founder and Head of Public Benefit, Anthropic [1:27] That mean? So I'll give you an example. So at Anthropic, we recently published a post where we took a large piece of software that we've been using for years and we completely rewrote it from the ground up using our own technology and we made something much faster and more efficient than we'd had before. But it took the willingness to sort of take the old way of doing things and be willing to completely change it and throw out and replace with something new. And generally — Right,

Jeffrey Roach [1:52] So this is very interesting to dissect. And it takes sort of belief. The most obvious phrase here on creative destruction. The key point here is this. As market watchers, economists, investors, whoever you are, I think one of the things that's really important to watch is what sector can address these changing conditions and what sector can implement those changing conditions.

So think about the financial sector, the technology sector, the IT sector. Those utilization rates for AI, those adoption rates are pretty high. Think about, on the other hand, healthcare, construction, leisure hospitality sectors, much lower adoption rates right now. So key takeaway I think at this point is look at how quickly these sectors can adapt and the quicker, the more stable, the better that they can implement, the better off in the long run.

All right, so let's now listen. Very different topic, very different personality, but here's the second clip.

Kevin Warsh, Fed Chair [2:53] Conform to our expectations. We'll be meeting a couple more times this year and that will be the crystallizing moment at which we're going to look out the window. What do we see? What's happening to output? What's happening to employment? What's happening to inflation? And in those intermediate periods — All right,

Jeffrey Roach [3:11] So here's the age old question. Is the Fed going to raise rates? Are they going to cut rates? Of course, that's been the frustration with markets trying to figure out, okay, is inflation truly becoming a lot stickier and this last mile getting back to 2% is going to take a lot longer than originally anticipated.

I think the short answer, of course, is this is a very different market now than what it was just seven or eight months ago, thinking about how we were thinking going into 2026. So here's Chair Warsh. He's at the IMF meetings in Bangkok. He's being asked the question about policy.

And of course, one of the things that we're learning about Chair Warsh is that he's not interested in what we call forward guidance, which just means they're not going to preset the path of interest rates.

Jeffrey Roach [4:09] They're going to basically say, "Look, we're going to watch the data just like everybody else. Don't expect us to pre-commit." Now, there's a couple things that are highly nuanced here. One is the fact that we have a lot of other voting members of the committee that are giving us some forward guidance.

And then the second issue here is we do know that it's a challenging environment because so much of the inflation dynamic is being twisted and thwarted by the challenges in the Middle East. Key takeaway here is I think what we're seeing is the longer energy prices stay elevated, the more likely that the pressures will show up in a lot of other categories that would show the stickiness of inflation is staying.

So think about furniture, think about apparel, used, and new vehicles. But at this point though, I think they're probably going to be able to get away with passing on the October meeting, hiking in December, and perhaps another hike in Q1 2027.

Jeffrey Roach [5:15] However, things should look a lot better by the time you hit March of next year where inflation should start easing closer to 2%. They're not going to get that 2% target in the next several quarters, but at least the directional change is favorable for policymakers.

All right, third and final in terms of the hot topics going on right now is, of course, the challenges in France, the protests, and what it means for the European economy. Let's take a listen on this third clip.

Emmanuel Macron, President of France [5:50] Peacefully with looters and rioters, because there are people out there who rightfully feel that the price of fuel is going to higher price, which is increased because of what is happening in the Persian Gulf, a war that France was not part of. This is a miscontent that is being expressed in other European capitals. And there is a lot that we can do to ensure that we have our own fuels that we can weigh in on the price of fuel.

Jeffrey Roach [6:17] Well, of course, that was the president of France and his focus there is trying to create some calm in an otherwise quite a period of unrest in the country.

So I think one of the things that we need to think about here as it relates to the global economy, we do know whenever there's a spike in uncertainty, spike in volatility, we still are seeing a flight to safety going into U.S. capital markets. We've seen this recently where after the CPI print, even though it was a little bit hotter, we saw yields on the 10-year drop because of some of the geopolitical pressures bringing a flight to safety bid, we often say.

Same thing with dollar strength. So when you think about the pressures in France, France is not the largest economy in Europe, but certainly a major player, I think it's still fair to say that we're seeing a lot more uncertainty in the economies in Europe.

Jeffrey Roach [7:22] We're also seeing a little bit more of a headwind given the fiscal imbalances in France, and that is creating the unrest. And I think what that does is it helps explain why this flight to safety bid going into U.S. markets is there.

And at this point, going forward, I think it's very helpful for investors to continue to watch the really three key factors. One is the direction of the dollar, second, the direction of yields on 10-year, and third is gold prices.

Certainly, these items, these categories often benefit when there's global unrest. Certainly, those metrics important for going forward for the rest of this year and going into 2027.

Well, that's all for now in this edition of Market Signals from LPL Research, and as our chief investment officer likes to say, allocate wisely.