Eastspring Investments, the investment arm under Prudential plc, has released its latest Chief Investment Officer's Weekly Insights report. While inflation remains elevated, its directional shift has eased concerns over imminent rate hikes. At the time of writing, interest rate markets have priced the implied probability of a September Federal Open Market Committee (FOMC) rate increase at just 29%, a sharp drop from the over 72% level seen after the July meeting's hawkish hold. Furthermore, markets are no longer fully pricing in a rate hike before year-end.

Persistent fiscal worries continue to push term premiums higher, leading to a steeper U.S. Treasury yield curve. If long-end yields keep climbing without a clear reacceleration in inflation, the resulting tightening of financial conditions could allow policymakers to hold rates steady for a longer period. Despite this, the team remains vigilant about the risk that Middle East conflicts could reignite inflationary pressures, noting that underlying inflation is still noticeably above target levels. Inflation risks are particularly relevant for economies heavily dependent on energy imports, while El Ni帽o-related food price pressures could further elevate headline inflation by 2027.

In the Asian region, the team continues to expect most central banks to maintain or extend their tightening cycles over the coming quarters, with China and Thailand standing out as notable exceptions. On the other hand, major hyperscale cloud service providers have consistently raised their AI infrastructure spending plans, strengthening the argument for sustained earnings momentum within the AI ecosystem. As a result, investors are gradually rotating back into AI-benefiting stocks, with growth shares once again outperforming the broader market and cyclical sectors.

Eastspring Investments believes that directional changes in U.S. inflation data have tempered short-term rate hike expectations, yet fiscal and geopolitical factors continue to support higher long-end yields and term premiums. Meanwhile, ongoing upward revisions to AI infrastructure investment provide earnings support for related growth themes. Investors must strike a balance among inflation risks, policy trajectories, and the long-term AI trend.