'The biggest components of inflation outside energy don't really care about energy prices': Manley

Key Concepts

• Geopolitical Off-ramp: A diplomatic path toward de-escalation in the US-Iran conflict.
• CPI Inflation Drivers: The underlying components of the Consumer Price Index, specifically shelter costs.
• Hyperscalers: Large-scale cloud computing and AI infrastructure providers.
• AI Capex Buildout: The massive capital expenditure currently being directed toward artificial intelligence infrastructure.
• Market Rotation: The movement of capital between different sectors or geographic regions.
• Secular Theme: A long-term trend that persists regardless of short-term economic cycles.

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1. Geopolitical Tensions and Energy Markets

The US and Iran are scheduled to hold talks in Qatar following recent disruptions in the Strait of Hormuz. Both nations have agreed to maintain commercial shipping traffic for the time being.

• Market Outlook: Jack Manley (JP Morgan Asset Management) suggests that oil prices are unlikely to drop significantly further. The market has been searching for an "off-ramp" to the conflict, and the current memorandum of understanding represents the most tangible progress toward de-escalation seen in months.
• Drivers: The anticipation of a conflict resolution—potentially accelerated by the US midterm elections—has already exerted downward pressure on energy prices.

2. Inflationary Components and Energy Insulation

Manley argues that even if energy prices decline, the broader inflationary environment in the US and Canada will remain largely unaffected.

• Shelter Costs: This sector accounts for nearly 50% of inflation. It is driven by housing shortages, stagnant existing stock, and high mortgage rates—factors that are structurally independent of the price of a barrel of oil.
• Core vs. Headline: While energy costs can have a "residual carryover" into headline inflation, the impact on core inflation is expected to be marginal because the primary drivers of the CPI are not directly linked to energy inputs.

3. Tech Sector Volatility and Federal Reserve Policy

Recent pullbacks in the tech sector are characterized by Manley as a "temporary correction" rather than a fundamental shift.

• Fed Influence: The sell-off was triggered by the Federal Reserve’s recent summary of economic projections and the "dot plot," which hinted at potential interest rate hikes due to persistent inflation.
• Capex Resilience: Manley contends that a 25-basis-point shift in interest rates will not disrupt the long-term business plans or profitability of "hyperscalers" investing in AI. While rate changes can alter market sentiment and valuation multiples, they do not change the fundamental investment trajectory of the AI buildout.
• Fed Outlook: Manley expresses skepticism regarding further rate hikes, suggesting the Fed is likely finished moving rates in either direction for 2026, with a bias toward eventual cuts.

4. Diversification and the AI "Gravitational Pull"

The market is currently heavily concentrated in the AI trade, which presents a risk for investors.

• The AI Paradox: There is a massive disparity between the trillions of dollars in capital expenditure (capex) being poured into AI and the lack of tangible, large-scale "trillion-dollar problems" solved by the technology to date.
• Strategic Diversification: To hedge against the concentration risk of the US tech sector, Manley recommends looking toward high-quality developed markets, specifically Europe, the UK, and Canada.
• The "Asset" of Under-exposure: Historically, the lack of tech exposure in these international markets was considered a liability. Manley argues this has now become an asset, as these regions provide a "place to hide" from the intense volatility and gravitational pull of the US-centric AI trade.

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Synthesis and Conclusion

The current market environment is defined by a tension between geopolitical de-escalation and structural economic realities. While the potential for an off-ramp in the US-Iran conflict provides relief for energy prices, the broader inflationary picture remains anchored by non-energy factors like shelter. Similarly, while the tech sector faces short-term volatility due to Federal Reserve signaling, the long-term AI investment thesis remains intact. However, due to the extreme concentration of capital in AI, investors are advised to seek diversification in international markets that lack the same tech-heavy exposure, effectively turning a historical weakness into a modern defensive strategy.