The chaos around the world is expected to make the U.S. dollar stronger, which in turn is deflationary. In the meantime, any Fed key cuts will be postponed until the recent surge in energy inflation dissipates. I was on Fox Business when the Labor epartment reported that the Producer Price Index () rose 1.4% in April and 6% in the past 12 months.
The big problem with the PPI was that the wholesale goods costs rose 2%, while wholesale service costs rose 1.1%, so the inflation on the wholesale level is embedded and will likely persist. This means our new Fed Chairman, Kevin Warsh, has his hands full and it will take some time to convince other members of the Federal Open Market Committee () that key interest rate cuts might be necessary in the upcoming months.
I am not ruling out coordinated action by Treasury Secretary Scott Bessent and Kevin Warsh to shove Treasury yields lower later this year. However, the best thing that Bessent and Warsh can do is to argue that the AI productivity gains the U.S. is experiencing are naturally deflationary and to try to coax Treasury yields lower.
The other event that could cause Treasury yields to migrate lower will be any kind of currency panic that may ensue if Britain, China, Japan, or other countries experience capital flight from political or economic duress. The bond vigilantes are demanding higher yields from Britain, France, Japan, and other countries with demographic problems (i.e., shrinking households) and budget problems. The big difference between the U.S. and the rest of the world is that we can grow our way out of many of these problems, plus we have better demographics, we better assimilate immigrants and we have 50 states competing with each other to ensure economic success.
Meanwhile, NextEra Energy (), which is a big utility in Northern Florida, is buying Dominion Energy (D), which provides electricity in Virginia. Due to the data center boom in Virginia, NextEra Energy plans to steadily grow by selling electricity to data centers. Virginia sits inside PJM Interconnection, the biggest electricity grid in the U.S. Interestingly, battery storage facilities are being increasingly added in Virginia, since they can be deployed faster than new natural gas-fired electric plants. Since most new data centers are utilizing direct natural gas lines to generate their own electricity via Bloom Energy’s fuel cells or GE Vernova’s (GEV) turbines, it will be fascinating to see if NextEra Energy can effectively compete with data centers in other states that generate their own electricity via natural gas.