Fed Uncertainty and AI Financing Shape Portfolio Thinking Amid Inflation Concerns

The Federal Reserve's policy calculus has become increasingly complicated by a weak US employment report in July. The jobs data, which showed a decline of 23,000 nonfarm payrolls against expectations for an increase of 80,000, strengthened the case for patience among policymakers. However, Nuveen argued that inflation remains the more important determinant of whether the Federal Reserve can stay on hold.

Nuveen and PGIM both noted that high-yield credit offers compelling income, but security selection matters. The ICE BofA US High Yield Index offered a yield to worst of approximately 7.4%, with BB-rated issuers now representing around 60% of the index. However, Nuveen stressed that attractive income does not remove the need for active management.

The enormous financing requirements associated with AI infrastructure are spreading beyond equity markets into investment-grade credit, mortgages, emerging-market trade flows and the wider cost of capital. PGIM's research highlighted how the AI investment cycle is moving beyond technology equities into the wider macroeconomy.