Nomura: The next few weeks are a key window for the release of tariff effects, the risk of stagflation in the U.S. is increasing, and the Federal Reserve may not cut interest rates until December

Against the backdrop of escalating global trade frictions, Nomura warns that the global economy is entering uncharted waters, and the market's underestimation of policy risks may become a significant hidden danger in the second half of the year. In an online communication session held for Chinese media on Thursday, Rob Subbaraman, Head of Global Macro Research and Co-Head of Global Markets Research at Nomura, stated that the global economy is stepping into an uncertain "unknown territory." He pointed out that from the Federal Reserve's policy path to the economic policy changes brought by the Trump administration, and to the rising geopolitical risks, the global market is facing a rare combination of multiple risks since the financial crisis. Rob warned that the U.S. will face typical stagflation pressures of "rising inflation + slowing growth" in the second half of the year, and the Federal Reserve will be very cautious, with interest rate cuts not expected until December, and the extent of the cuts may be lower than market expectations. He specifically reminded that currently, U.S. companies are hoarding imported inventory, and tariffs have not yet truly reflected in consumer prices, but as companies restock in Q3, the rising import costs will inevitably transmit to inflation, with U.S. core CPI expected to rebound to 3.3% in the fourth quarter. Rob stated: “We are entering a critical moment in the coming weeks because I believe we will start to see more evidence that tariffs are affecting U.S. economic data in the next few weeks.” Regarding Trump's proposal to appoint a "shadow Federal Reserve chairman," Rob believes that the upcoming key personnel changes may provide a practical channel for this: At the end of January next year, Federal Reserve Governor Adriana Kugler's term will expire, creating a vacancy in the FOMC, and Trump can nominate a new candidate; by May, the current Federal Reserve Chairman Jerome Powell's term will end, and Trump will have the right to nominate the next chairman. Although the Federal Reserve has institutional safeguards (such as personnel needing Senate approval, and the dispersion of FOMC decision-making power), the influence of politics cannot be ignored. Rob stated that the independence of the Federal Reserve may not be lost immediately, but this risk is at its highest in decades. Key highlights from the insights are as follows: Looking ahead to the second half of the year, the global economy will be in an unknown territory. I believe we are facing extreme uncertainty in economic policy, especially from the new Trump administration in the U.S., but there are also many geopolitical uncertainties and financial market uncertainties at present. Regarding the U.S. economy, we believe there will be more signs of stagflation pressures in the second half of the year, namely rising inflation and slowing economic growth. Due to rising inflation, we believe the Federal Reserve will be very cautious, with interest rate cuts not expected until December, and the extent of the cuts will be lower than current market expectations. I believe that Trump's use of tariff leverage is not only to reduce the U.S. trade deficit but also involves many other factors. I think the most important thing for the market is whether he will follow through. Because another thing that happened is that he said tariffs would not take effect until August 1, so countries still have room for negotiation If the United States really imposes high tariffs on the European Union, the EU may take retaliatory measures that harm U.S. interests. If necessary, the EU is prepared with many retaliatory measures. Therefore, it will be very interesting to see if the U.S. and the EU can reach a good agreement. I think what is encouraging at this stage is that the EU has not received any letters, which means negotiations are still ongoing. As for China, fiscal policy can be flexibly adjusted and can be utilized more. I believe that at this stage, there is more room to use fiscal policy than monetary policy, and it may be more effective. The U.S. Treasury may try some measures to keep long-term interest rates and U.S. Treasury yields low. The Treasury may repurchase debt. They may try to issue more short-term Treasury bills instead of long-term bonds. The inflation rate in the U.S. has remained relatively low. We still believe that inflation will rebound. To be honest, this is happening a bit slower than we expected. But we remain confident in our forecast for a rebound in U.S. inflation. It is expected that by the fourth quarter, the core CPI will reach 3.3%. We know that U.S. imports surged in the first quarter, and U.S. companies seem to have imported in advance to buy as many overseas products as possible under lower tariffs. So their inventories are high, and they can temporarily consume these inventories. But you know we are already in June and July, and once the inventory is depleted, they will have to start restocking, and then they will have to start importing. So we believe it is only a matter of time before tariffs begin to affect businesses. I think we will enter a critical moment in the coming weeks, as I believe we will start to see more evidence that tariffs are affecting U.S. economic data. But the critical moment is equally important because I think by the August 1 deadline, we will see whether Trump will really use tariffs as leverage credibly or back down. Trump may not be as TACO as the market expects. I think you have to look at Trump; he has achieved many victories in the past few weeks or months... He has moved faster with the "Big Beautiful Deal" than most people expected, and U.S. stocks have returned to historical highs. He may also appoint a member of the Federal Open Market Committee (FOMC) at the end of January. Federal Reserve Governor Adriana Kugler's term will expire at the end of January, so there will be a vacancy, and Trump can appoint someone else. Of course, Federal Reserve Chairman Powell's term will end in May, so Trump can appoint someone else. I do not believe that the Federal Reserve losing its independence from the government is our baseline prediction, but it is a greater risk than it has been in decades. If it really happens, it will be very detrimental to the U.S. economy and markets. The situation this year may be that after so much over-investment in the U.S., the U.S. economy may be transitioning from a truly exceptional economy to a more normal economy, which is why we see investors no longer concentrating so much capital in the U.S. Trump is actually helping Europe become "great" again; he is putting tremendous pressure on Europe to support its own economy more and reduce dependence on the U.S., which is certainly reflected in defense spending The United States still has room to rebalance its overseas investment portfolio. For the past decade or even longer, the amount of investment from the U.S. has been so significant that we believe our indicators are gradually normalizing. The dollar remains severely overvalued, and the trade deficit is still enormous. The following is the full text of the interview (translation): Host: Today we have over ten media representatives from China who are eager to hear your views on the current global economic outlook. So, she, okay, let me see. I think we are basically all here. So, shall we get started, Rob? Rob Subbaraman: Yes, I’m sure. I’m happy to start. Host: Okay, thank you. Hello everyone. Thank you very much for joining the meeting with Rob Subbaraman, the Global Head of Micro Research and Co-Head of Global Market Research at Nomura. This is an online media briefing with more than 10 participants, and I will explain the specifics later. Thank you all for attending this briefing. We will have an hour today. First, we would like to invite Rob to briefly introduce his main views on the global economy and future prospects. Please welcome Rob. Rob Subbaraman: Okay, sure. It’s great to be back. It’s been a while since I last spoke with you. I see some familiar names on Webex. Thanks to Judy for organizing all of this. I know Judy you have compiled a lot of questions, so I will keep my opening remarks brief and then I’m happy to start answering all the questions. So I think, looking ahead to the second half of the year, the global economy will be in uncharted territory. I believe we are facing extreme uncertainty in economic policy, especially from the new Trump administration in the U.S., but there is also a lot of geopolitical uncertainty and financial market uncertainty at the moment. In terms of the U.S. economy, we expect to see more signs of stagflation pressure in the second half of the year, namely rising inflation and slowing economic growth. Due to rising inflation, we believe the Federal Reserve will be very cautious and will not cut interest rates until December, and the rate cut will be lower than the market currently expects. The situation in other parts of the world is slightly different from that in the U.S. In the U.S., we have reasonable forecasts for inflation, and economic growth is expected to slow slightly. However, in other parts of the world, we believe that while economic growth slows, inflation will also ease. Therefore, both economic growth and inflation will be weak. Thus, we believe other central banks will have more room to cut rates. Although the Federal Reserve may maintain interest rates in Asia, we expect that the decline in exports will intensify in the second half of the year. We believe that the Chinese economy will significantly slow down in the second half of the year. I can talk about Dr. Lu Ting's views on this. In Europe, we believe that it is still too early for all of Germany's fiscal, infrastructure, and defense spending to really take effect this year. We think this will take time, perhaps starting next year. This year, we believe that the impact of tariffs and a tighter financial environment will somewhat slow down economic growth. Wait, let me pause for a moment. What I want to say is that I think there are many risks. We can discuss further. Interestingly, I believe that the market, especially the credit market and stock market, is overall quite optimistic They believe the world is half full, which is quite striking to me considering all the risks that currently exist. So, you know, I do think that if some of those risks actually materialize, the market could be disappointed. We can discuss what those risks are in the questions. Judy, I might stop here. So I want to summarize that this is an unknown territory. Very uncertain, with many risks, my team, we are basically taking a cautious approach, but I am happy to answer questions because I know there are many. Host: Yes, thank you, Rob. This way we can go directly into the Q&A session. For our reporters, if possible, could you please ask only one question? Because we have many reporters today. After the first round, we can start the next round. Please click the button to raise your hand. Reporter 1: Hello, Rob. My question is, Trump has sent out more than 20 letters, but most of the countries that received the letters are emerging markets. So I want to ask, some of these countries do not have a trade deficit with the U.S., why choose them to receive the letters? Rob Subbaraman: Yes, you are right, so far most of the letters have been sent to smaller emerging market countries. You are correct that most of these countries have a significant trade surplus with the U.S., but I think there are some exceptions. Japan, South Korea, and perhaps Malaysia are more prominent in this regard. But I think we have learned that the Trump administration uses tariffs not only to reduce the U.S. trade deficit but also for a variety of other reasons. You know, some reasons are related to foreign policy, some are related to trend shipments, and some are about leveraging certain countries to evade U.S. tariffs. There are also some reasons that are purely geopolitical, as we recently saw, the U.S. threatened to impose a 50% tariff on Brazil. So I think Trump is using tariff leverage not just to reduce the U.S. trade deficit, but for many other factors. I think the most important thing for the market is whether he will follow through. Because another thing that has happened is that he said the tariffs will not take effect until August 1, so there is still room for negotiation for countries. I want to say that among all the negotiations, the most important for the market may be the U.S.-EU trade negotiations. Because the EU is not a small emerging market. It is a very large export market for the U.S., and if the U.S. really imposes high tariffs on the EU, the EU may retaliate, harming U.S. interests. If necessary, the EU is already prepared with many retaliatory measures. So, it will be very interesting to see if the U.S. and the EU can reach a good agreement. I think what is encouraging at this stage is that the EU has not received any letters, which means negotiations are still ongoing. This (the Inflation Reduction Act) is to maintain the status quo... it is not as expansionary as it appears on the surface. It is far less stimulative or expansionary than the fiscal policies during the pandemic or the global financial crisis... Given that the U.S. will hold midterm elections next year, our thought is that it is not surprising to roll out more stimulus measures in the next 12 months We believe this could contribute 0.4 to 0.5 percentage points to economic growth. Reporter 2: What is your view on China's policy interest rates? Rob Subbaraman: I think China's interest rates are already quite low. So, you know, if you look at the absolute yield level of the seven-day open market operation (OMO) rate, I think it's around 1.4%. That's quite low. It's good to talk about the historical levels of China's bond market today. Yes, you know, the yield on Chinese government bonds is also quite low now. You know, I think when interest rates are already very low, significantly lowering them further will face challenges. I can think of three to four risks. I mean, one risk of ultra-low or negative interest rates is that it may exacerbate asset bubbles, right? If there are no interest rates, or even negative rates, people have no incentive to deposit money in banks. If it's a negative rate, you have to pay the bank to keep your money there. This could exacerbate asset bubbles. Many countries have experienced this in the past. Additionally, if interest rates remain at very low levels, it will reduce the effectiveness of monetary policy because banks' profit margins will be squeezed. Therefore, when banks' profitability declines, they may be less willing to extend credit. Thus, credit growth may slow down. The third risk I want to mention is that if interest rates are very low, especially relative to the United States, this may encourage more capital outflows and put depreciation pressure on the domestic currency. The fourth risk I want to mention is that if interest rates remain low for an extended period, it may lead to more inefficient enterprises. These enterprises are often referred to as "zombie companies" because they can survive due to low interest rates, allowing them to continue borrowing money, but they are not actually profitable. Therefore, lowering interest rates too much can bring many challenges. I think during the global financial crisis, central banks around the world did this, even adopting quantitative easing policies to try to lower long-term rates. I think they realized that doing so would bring many negative effects, and they wouldn't really do it unless a major crisis occurred. I think in the case of China, fiscal policy can be flexibly adjusted and can be utilized more. I believe there is more room to use fiscal policy at this stage than monetary policy, and it may be more effective. My colleague, Chief Operating Officer Richard, has always maintained this view, saying it is a lesson from Japan's experience: after experiencing a severe real estate market crisis, when household confidence is low and deleveraging is occurring, it is best to use fiscal policy. Thank you for your question. Reporter 3: Hi, Rob. It's great to see you here. My question is, on July 3rd, the U.S. House of Representatives passed a bill called the "Big Beautiful Bill." Some believe this bill may further increase the U.S. deficit rate. Do you agree? What is your view on the impact of this bill on the U.S. microeconomy? Rob Subbaraman: Okay, that's a very good question. So, I think this bill passed much faster than most people expected. So, Trump and the Republicans passed this bill so quickly Now, the first point I want to make is that, as you can see from the headlines, this will increase the debt burden by over $30 trillion. I think some estimates are $34 trillion or $36 trillion. This means that the budget deficit over the next 10 years will exceed $30 trillion. So $34 trillion, or possibly even higher, is a huge number. That’s $340 billion each year. But I think it’s important to understand that most of the increase in future budget deficits is to pay for the tax cuts from 2017, which were originally intended to be temporary, with individual income tax cuts originally set to expire at the end of this year, but now have become permanent. So, this constitutes a large part of the increase in the budget deficit. Therefore, this is not actually an expansionary measure because if you think about it carefully, if you do not extend the tax cuts, American consumers and households would suddenly start paying higher taxes again at the end of this year. So, this is to maintain the status quo. So, first of all, it’s not as expansionary as it seems on the surface. It is far less stimulative or expansionary than the fiscal policies during the pandemic or the global financial crisis. That said, other parts of the bill, whether it’s eliminating the tip tax or overtime tax, or subsidies for the elderly, or raising the threshold for SALT taxes, many of the tax cuts are front-loaded, while spending cuts are back-loaded. Therefore, given that the U.S. will hold midterm elections next year, our thought is that it is not surprising to see more stimulus measures rolled out in the next 12 months. We believe this could contribute 0.4 to 0.5 percentage points to economic growth. That’s the stimulative effect we see from this bill. Now, it will continue to remain this way. You know, it’s not common to implement fiscal stimulus measures when the unemployment rate is still so low. Typically, the government would try to cut the budget deficit. But in the U.S., the budget deficit seems likely to remain well above 6% of GDP in the coming years. And, you know, with the budget deficit already so large, public debt is approaching 100% of GDP, which is unsustainable. This means higher interest expenses. And all of this is happening at a time when the stability of U.S. Treasuries is not what it used to be. In the past, you know, a major source of demand for U.S. Treasuries was foreign central banks. They are still buying, but not as much as before, so this gap has been filled by private sector investors buying U.S. Treasuries, such as leveraged hedge funds that are more sensitive to prices. Therefore, in the short term, U.S. bond yields are more susceptible to shocks. The U.S. Treasury may try some measures to keep long-term rates and U.S. Treasury yields low. The Treasury may buy back debt. They may try to issue more short-term Treasury bills instead of long-term bonds. The regulatory framework for statutory leverage has also changed. The Treasury can try many measures, but we believe the scale of these measures is small and will not have a long-term impact. Ultimately, I am indeed concerned about the fiscal situation in the U.S. I believe this will ultimately put greater upward pressure on long-term U.S. Treasury yields. And, you know, fundamentally, the choice that the U.S. must make is either to compress the budget deficit, which means cutting spending, raising taxes, or increasing revenue They can either do this or choose the financial repression implemented after World War II, forcing financial institutions to buy more U.S. Treasury bonds. Alternatively, they could pressure the Federal Reserve, or adopt a fiscally dominant policy to compel the Federal Reserve to implement more quantitative easing and purchase U.S. Treasury bonds again. However, many of these factors could lead to inflation. So this is a risk. I mentioned from the beginning that the risk exists. I believe, as you said, this issue poses a significant risk to the U.S. economy. I think the biggest impact of fiscal challenges is that long-term interest rates may rise over time. Host: Okay, thank you, Rob. Next question. Reporter 4: You just mentioned that U.S. inflation is rising, but the impact of tariffs has been minimal so far. Why is that? How do you assess the long-term impact of Trump's trade policy? Thank you. Rob Subbaraman: Okay, there are two questions here. You are correct that so far, U.S. inflation has remained at a relatively low level. We still believe inflation will rebound. To be honest, this is happening slower than we expected. But we remain confident in our forecast for U.S. inflation to rise. For example, U.S. CPI data will be released next week, and the current core inflation rate is 2.8%. We expect the core inflation rate to reach 3.3% by the fourth quarter. Why do we believe U.S. inflation will rebound? The first reason is something most people are aware of, which is tariffs. Why hasn't it happened yet? We know that in the first quarter, U.S. imports surged, and U.S. companies seemed to have imported in advance to buy as many overseas products as possible under lower tariffs. So their inventories are high, and they can temporarily deplete these inventories. But once the inventories are exhausted, you know we are already in June and July, once the inventories are depleted, they will have to start restocking, and then they will have to start importing. So we believe it is only a matter of time before tariffs begin to affect businesses. We do not think otherwise, and we believe that since the U.S. economy is still performing quite well, businesses will pass a significant portion of costs onto consumers. The second reason is immigration policy. I believe you all know that the U.S. has been cracking down on illegal immigration and deporting illegal immigrants. We believe this has led to labor shortages in key industries that heavily rely on immigrant labor, such as construction, agriculture, elder care, and even childcare. Moreover, it is not easy to replace foreign labor with local labor. Therefore, the risk is that wage pressures begin to increase, which could exacerbate inflation. The third factor, which I mentioned earlier, is that as the midterm elections approach, fiscal policy will moderately expand. I previously stated that this could drive GDP growth by 0.4 to 0.5 percentage points over the next 12 months. This could also push inflation higher. So overall, we do believe inflation will rebound. As for tariff policy, you know, I just want to say that we are currently at a very interesting juncture because I think the market's view on the trade war is optimistic. They are optimistic that an agreement will eventually be reached because they believe Trump cannot afford to raise tariffs further, as this would impact the U.S. economy I just talked about the impact on inflation. So they believe in the so-called TACO theory ("Trump Always Chickens Out"). I think we are entering a critical moment in the coming weeks because I believe we will start to see more evidence that tariffs are affecting U.S. economic data. But the critical moment is equally important because I think by the August 1 deadline, we will see whether Trump will really use tariffs as leverage reliably or if he will back down. So the next 2-3 weeks will be very interesting to see if the market is correct. They assume that tariffs will not rise significantly and will gradually decline and escalate. And they believe that tariffs will not have a significant impact on economic data. We are not so confident about that. As I said, we do believe that inflation will start to rise again. We also do believe that Trump may not TACO as the market expects. I think you have to look at Trump; he has achieved many victories in the past few weeks or months, whether it’s around the foreign policy of bombing Iran or pushing NATO to increase defense spending. He has moved faster with the "Big Beautiful Deal" than most people expected, and the U.S. stock market has returned to near historical highs. So, he may ultimately not TACO as the market expects. Host: Okay, thank you. Next, please. Reporter 5: We. My question is about the Federal Reserve. How do you view Trump's shadow chairman plan? Are you concerned that this new chairman may lose some deterrent power next year? What impact could this have? Rob Subbaraman: That’s a very good question, and I’ve been thinking about it. Thank you very much for your question. You know, I’m concerned that the new Federal Reserve may lose some independence? I think concerns about the independence of the Federal Reserve have reached their highest level since the 1970s, and that was a long time ago. So, their concerns about whether the Federal Reserve can maintain its independence have reached the highest level in decades. You know, Trump recently stated that the U.S. federal funds rate should be lowered by 3%, which is a reduction of 300 basis points. He said the current rate is too high, costing the U.S. government $360 billion in refinancing costs each year. As you mentioned, he has threatened to appoint a shadow official, and he could do so at any time. He may also appoint a member of the Federal Open Market Committee (FOMC) at the end of January. The term of Federal Reserve Governor Adriana Kugler will expire at the end of January, so there will be a vacancy that Trump can fill. Of course, Federal Reserve Chairman Jerome Powell's term will end in May, so Trump can appoint someone else. Now, I want to say that even if Trump has a very negative attitude towards the Federal Reserve, especially Chairman Jay Powell, it is still difficult for him to influence the Federal Reserve's policy. The Federal Reserve has many safeguards and a very strong institutional infrastructure that makes it difficult for the government to truly control monetary policy. You know, this model has been in place since the 1950s Monetary policy and fiscal policy must be separated because the government's term is only four years. Therefore, they have short-term incentives to do as much as possible during this period, but this may also lead to inflation. So they want the Federal Reserve to be independent of the government, focusing more on long-term development and avoiding stimulating economic growth in the short term, which could lead to permanent inflation issues. Reporter 6: So, you know, where are these safeguards and institutional infrastructures? Rob Subbaraman: Let me point out a few things. First, I want to say that regardless of who Trump appoints to the FOMC, there will be a vacancy for an FOMC member in January next year, and Jay Powell's term as chairman will end in May. But whoever Trump chooses must be approved by the Senate. So it's not just his choice. It also requires the approval of a majority of the Senate. That's the first point. The second point is that monetary policy is not determined solely by the chairman, nor is it decided by just one person. The FOMC has a total of 19 members, of which 12 have voting rights. So even if Trump appoints someone who can act according to his wishes, it is unclear whether that would be enough to sway the decisions of the entire FOMC. That said, Trump is a very powerful figure. Moreover, after Paul steps down as chairman next year, we may see a new chairman who is more aligned with Trump's stance, and this person may have a considerable influence on other FOMC members. So I say, I don't think the Federal Reserve will lose its independence from the government is our baseline forecast, but the risks are greater than they have been in decades. If it really happens, it would be very detrimental to the U.S. economy and markets. Because one risk is that the Federal Reserve will keep interest rates too low, leading to rising inflation. Another risk is that foreign investors will lose confidence in the value of their assets in the U.S., fearing that these assets may be eroded by inflation, thus long-term interest rates may rise, and the dollar may fall. It is well known that the dollar has been declining this year. Finally, I want to mention the influence of the shadow Federal Reserve. If Nomura's forecast is correct, then U.S. inflation could rise in the next one, two, or three months. So, Trump will find it difficult to shift the blame to Powell because Trump has stated that Powell needs to cut rates due to low inflation. But if inflation rises, what will he, Trump, do? He could appoint a shadow Federal Reserve chairman. And this shadow Federal Reserve chairman, in fact, even if he is not the chairman, he or she is not the chairman now. This person could say, well, inflation is rising, but it will be a one-time thing, even if the Federal Reserve does not cut rates now. When the new chairman takes office at the mid-year Federal Reserve meeting next year, there will be a significant rate cut. The market will heed the new chairman's advice because they are forward-looking. This will make the work of the current Federal Reserve officials and the FOMC more difficult because there will be cross-communication; if they sound like they want to hold steady and take a tough stance now, while in reality, the shadow officials of the Federal Reserve are saying not to worry, rates will be cut significantly next year, then their credibility will be damaged. Therefore, if the Federal Reserve cuts rates significantly, the situation will become more complicated I believe this may lead to an increase in long-term interest rates in the U.S., as people are concerned about long-term inflation issues. Host: Thank you, next question. Reporter 7: Thank you, Judy. Hi, Rob. It's great to see you again. My question is also about U.S. inflation. As you just pointed out, we have not yet seen the impact of tariffs on U.S. inflation, and I think this is quite a strong argument. So, U.S. companies have a lot of upfront investments. But I'm wondering how you view the deflationary effects brought about by the power of artificial intelligence? Do you think this also offsets inflationary pressures to some extent? If so, then due to the power of artificial intelligence, its impact will continue to manifest as things develop. Do you think we need to consider this artificial intelligence variable when considering the inflation outlook in the U.S.? Rob Subbaraman: Yes, that's a good question, and it certainly poses a risk for most of you. Artificial intelligence is an extraordinary transformation that is happening. It is structural, so it will take many years to complete. But you know, artificial intelligence is starting to be adopted by companies around the world, especially in the U.S., and it is a general-purpose technology. Moreover, over time, it can save costs and improve productivity. Both of these points often lower inflation. So I understand. I, I, your rebuttal, I think it is correct. I want to say that while we think this is some of the impact brought by artificial intelligence, we believe that the deflationary effects or productivity improvements brought by artificial intelligence are still in a very early stage, and we think it is not that powerful at the moment. The phenomenon of artificial intelligence will last for many years. It will be somewhat like an exponential curve, but we believe that in terms of productivity and deflationary effects, we have not yet reached the peak of the curve. So we think the other factors I mentioned earlier, such as tariffs, immigration policy, and fiscal policy, will dominate inflation, but this is definitely a risk. Another thing I want to say is that while artificial intelligence should have a deflationary effect in the long run, in the short term, it may actually trigger inflation because the first step of artificial intelligence is a huge demand for investment, which may push up the costs of a lot of raw materials, such as investments in data centers. Therefore, the short-term effect may be that it is still unclear whether it fully plays a deflationary role. There are indeed some inflationary factors in the short term due to all the investments in artificial intelligence, and the productivity improvements will follow. Host: Okay, thank you. Next is Irene Zhou. Reporter 8: Hi, Rob. It's great to see you again. I have some questions about U.S. stocks and European stocks. In fact, this year, experts in Europe have been quite exaggerated in their enthusiasm for buying European stocks and selling U.S. assets. This may be due to the market's demand for diversified investments. Personally, do you think the hype around European stocks is overblown? Or do you think most of the diversified investment funds will flow into the U.S.? For example, the benchmark index, however, the European stock market finds it difficult to continue outperforming the U.S. stock market. What are your thoughts? Rob Subbaraman: Okay, yes, that's a good question. First, regarding the United States, I think there are two views that suggest the exceptionalism of the U.S. is fading. I think there is a cyclical view, which we belong to, that believes the U.S. economy has been the most exceptional economy in the world over the past few years, with strong growth, low inflation, a booming market, and the theme of artificial intelligence. I believe that this year, after so much over-investment in the U.S., the U.S. economy may be transitioning from a truly exceptional economy to a more normal economy, which is why we see investors no longer concentrating so much capital in the U.S. That's it. This can explain why the amount of new dollar inflows into the U.S. is not as much, perhaps as the EU has mentioned, it has been diversified into other countries. The other extreme is that the fading of U.S. exceptionalism is more structural, meaning that countries and foreign investors are avoiding risks and directly selling off dollar assets, believing that the dollar will no longer be a reserve currency. This is a more extreme situation. I think there is currently no strong evidence to support this. I think it's more about new investments becoming more diversified, with reduced investment in the U.S. and increased investment elsewhere. Additionally, foreign exchange hedging against dollar exchange rate risks may have also increased. So I think, more importantly, regarding the EU, I think people joke that Trump talks about MAGA (Make America Great Again), while European experts talk about making Europe great again. Trump is actually helping Europe become great again; he has put tremendous pressure on Europe to support its own economy more and reduce dependence on the U.S., which is certainly reflected in defense spending. But as you said, if the euro really wants to become a reserve currency, the EU needs to be more integrated. It needs to significantly reduce the vast regulatory differences between countries. It needs to establish a fiscal union. It needs to jointly issue bonds, issue euro-denominated bonds. It needs to strengthen integration in areas like education and defense. I think in areas like pharmaceuticals and capital markets, the EU is far behind in this AI race. I think it is still unclear whether the impact of Trump's shock will really have a huge effect, whether it will truly prompt the EU to try to break through many regulations to achieve closer integration, and whether it will allow private equity capital markets to genuinely fund EU innovation instead of letting funds flow to Silicon Valley. I think this is still unclear. I know the attitude of the European Central Bank president is indeed hard to say. This should be seen as a great opportunity for the EU to implement many of the suggestions made by his predecessor, Draghi. Draghi wrote an article on how to make the EU and Europe great again. We will wait and see, but I think it is too early to assert that all of this is happening now. So I tend to agree with your point of view. Host: Okay. Thank you. Thank you, Rob. Alright, the next reporter couldn't come due to other urgent tasks. So I will ask Melody for help. Melody, please Melody: Okay. Hello, Rob. What is your assessment of the US dollar index for the second half of this year and beyond? Thank you. Rob Subbaraman: Okay, yes, regarding the US dollar index, our assessment is that the dollar remains weak. We basically believe that the overall weakness of the dollar will continue into the second half of this year. This is partly based on our view that the US economy will face some stagflationary pressures, as I mentioned earlier. Economic growth is quite weak, and inflation is accelerating again. We do believe that the US still has room to rebalance its overseas portfolio. The amount of investment from the US has been so high for the past decade or even longer, and we think our indicators are gradually normalizing. The dollar is still severely overvalued, and the trade deficit remains huge. So, even with such interest rate differentials, the Federal Reserve only cuts rates in December, but other central banks are cutting rates more than the Fed and even earlier. We still believe the dollar will weaken, considering that the interest rate differentials are more favorable to the US, which is not common, but we think this is more related to the weakening of the dollar, which will lead to stagflationary pressures on the US economy again, as well as fiscal challenges. You know, perhaps there are longer-term mid-term opportunities in other parts of the world. In other words, if you look at it, in 2024 and 2023, the growth rate of the US economy is much faster than that of the Eurozone and most developed economies. But now it is slowing down. You know, even with the large-scale beautiful big plan, we believe that the growth rate of the US economy will still be below trend levels. That is to say, below 2%. We forecast the growth rate of the US economy to be 1.3% this year and 1.2% next year. So, you know, this is below the trend growth rate, which is more like 2% or slightly higher. Therefore, I think there is room for global portfolios to rebalance and diversify more away from the US. Host: Rob, thank you for taking the time. Thank you, all the reporters present are very supportive of us. Rob Subbaraman: Okay. Thank you very much, everyone, take care. Host: Thank you, everyone, goodbye