The Full Economic Picture: Connecting Growth and Inflation to Long Term Interest Rates

Capital Flows · Capital Flows · May 07, 2026 at 01:44 · ⏱ 6 min read  | Read on Substack ↗
Summary
The author argues that current macro data (real GDP 2%, nominal 6%, resilient consumption, and contained inflation) confirms a reflation regime, not stagflation, which supports equities and risk assets. This regime, combined with a structural floor on long end rates from fiscal deficits and a weakening dollar due to the Fed allowing real rates to fall, creates a bullish backdrop for AI capex beneficiaries and Mexico exposure.
  • •Real GDP at 2%, nominal at 6%, and Atlanta Fed Nowcast at 3.7% with fixed investment adding ~100bps — this is a strong macro regime inconsistent with recession narratives.
  • •Personal interest payments as a percentage of outlays are at highs but delinquencies are not rising, signaling consumer resilience.
  • •The economy is in reflation (growth + inflation positive), not stagflation; equities rally in reflation, which is consistent with current equity market performance.
  • •Long end rates have a structural floor because of a 5% fiscal deficit and negative trade balance; they will not break down to 2% without a fundamental fiscal shift.
  • •The Fed allowing short-term real rates to run lower than they should is forcing capital out of the dollar into risk assets, creating dollar weakness and a bid in EUR and MXN.
  • •Headline CPI matters more for Europe and Japan (net crude importers), while core matters for the US (net energy exporter); crude spikes temporarily strengthen the dollar but the trend is structural dollar decline.
Read time 6 min
Length 6,571 chars
Category finance
Trade Ideas
Capital Flows Global Macro Trader
Author explicitly states 'EWW remains the cleanest equity expression of the Mexico flow' as part of the dollar weakness and capital outflow thesis supporting Mexican assets.
Author explicitly states 'EWW remains the cleanest equity expression of the Mexico flow' as part of the dollar weakness and capital outflow thesis supporting Mexican assets. Risk: Mexico-specific political or trade policy shifts could disrupt the flow; dependency on US economic conditions and Fed policy.
EWW
Capital Flows Global Macro Trader
Author notes 'SMH melting up today is the AI capex transmission', tying the semiconductor ETF directly to the current reflation regime and AI investment cycle.
Author notes 'SMH melting up today is the AI capex transmission', tying the semiconductor ETF directly to the current reflation regime and AI investment cycle. Risk: Sector concentration risk; any slowdown in AI capex or reversal of the reflation regime could pressure semis.
SMH
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This newsletter, published May 07, 2026, features Capital Flows discussing EWW, SMH. 2 trade ideas extracted by AI with direction and confidence scoring.

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