Will U.S. interest rates rise to 8%? JPMorgan Chase, sudden warning!

Recently, JPMorgan Chase Chairman and CEO Jamie Dimon warned the market that U.S. inflation and interest rates may continue to be higher than market expectations. In the next few years, U.S. interest rates could soar to 8%.

He is worried that geopolitical events, including the Russia-Ukraine conflict, the Palestine-Israel conflict, and the political polarization in the United States, are likely to bring about the greatest risk since World War II and are crucial to the future of the world. Investors should not take it lightly. Dimon said that the market believes that the probability of a soft landing for the U.S. economy is between 70% and 80%, which is too optimistic.

At the same time, the Federal Reserve's expectations for an interest rate cut in 2024 have dropped to the "freezing point", reaching the lowest level since October last year.

It is worth noting that JPMorgan Chase strategists suggested in a report that investors may consider buying narrow call options on the Hong Kong stock index or the FTSE China A50 Index to prepare for a potential rebound in the Chinese stock market.

JPMorgan Chase CEO warns

On April 8, local time, in the annual shareholder letter, JPMorgan Chase Chairman and CEO Jamie Dimon said that in the next few years, U.S. inflation and interest rates may continue to be higher than market expectations. The Federal Reserve is ready to raise interest rates to a maximum of 8%.

Dimon believes that although many key economic indicators continue to improve and inflation is showing a slowing trend, looking forward to the future, there is still upward pressure on inflation, high inflation is likely to continue, and government spending will further expand.

Dimon said that U.S. economic growth is being driven by large government fiscal deficits and past stimulus measures. As societies transition to a green economy, reshape global supply chains, increase military spending and deal with rising health care costs, there is a growing need for government spending, "which could lead to continued high inflation and interest rates that markets are not anticipating." ". As a result, JPMorgan is prepared for benchmark interest rates to fluctuate in a range as high as 8% or as low as 2%.

Dimon said he is not so optimistic about whether the U.S. economy can achieve a "soft landing." He defined a "soft landing" as moderate growth in the U.S. economy compared with the overall market, coupled with falling inflation and interest rates. Although investors expect the probability of a "soft landing" for the U.S. economy to be "70% to 80%," he pointed out that it is worth noting that U.S. economic growth is being driven by large government fiscal deficits and stimulus measures, and the market is optimistic about the U.S. economy. The outlook is overly optimistic and the likelihood of achieving that desired outcome is "much smaller."

Dimon emphasized that tense geopolitics is reshaping the world and its economy. "Recent geopolitical events may bring the greatest risks since World War II and are crucial to the future of the world. Investors should not take it lightly."

Dimon wrote: "The impact of these geopolitical and economic forces is massive, unprecedented to a degree, and markets may not fully realize it until they are fully in effect for many years."

At the same time, Dimon believes that although the banking crisis is temporarily over, higher interest rates and economic recession may bring huge pressure to the entire economy. If long-term interest rates rise above 6% and are accompanied by economic recession, not only banks systems, but also highly leveraged companies and other sectors will be under significant pressure.

Dimon said, "Keep in mind that a 2% increase in interest rates will reduce the value of most financial assets by 20%, and some real estate assets, especially office buildings, may decline in value due to the impact of the recession and rising vacancy rates. More. Also keep in mind that during recessions, credit spreads tend to widen, sometimes dramatically. We should also consider that interest rates have been very low for a long time - it's hard to know how many investors and companies are actually paying for The stage is set for a higher interest rate environment."

Dimon also talked about AI. He said that the impact of artificial intelligence technology (AI) on mankind is comparable to that of the printing press, steam engine, electricity, computers and the Internet. Dimon said that currently, JPMorgan Chase has more than 2,000 AI and machine learning (ML) experts and data scientists working in 400 AI-related applications, including fraud detection, marketing and risk control.

In addition, JPMorgan is exploring the deployment of generative artificial intelligence (GenAI) in a range of areas, most notably software engineering, customer service and improving employee productivity.

At the same time, Dimon also admitted that over time, the use of artificial intelligence is expected to have an impact on almost all jobs and affect the labor structure. “It may reduce certain job categories or roles, but it may also create a lot of jobs that don’t currently exist.”

Interest rate cut expectations drop to "freezing point"

Latest data from the London Stock Exchange Group (LSEG) showed that futures traders' bets on how much the Federal Reserve will cut interest rates this year have fallen to their lowest level since October last year, amid evidence that the U.S. economy continues to strengthen.

Monday's Fed funds futures December contract showed that rate cuts are expected to be about 60 basis points this year, while rate cuts in early 2024 are expected to be about 150 basis points. Data from the Chicago Mercantile Exchange Group (CME) on Monday showed that 49% expected a first 25 basis point interest rate cut in June, down from 57% a week ago.

Over the past few months, investors' expectations about the extent and timing of the Fed's interest rate cuts have shifted rapidly, growing more skeptical that policymakers can lower rates without triggering a rebound in inflation while the economy is strong. After the latest bombshell U.S. jobs report on Friday showed the economy remains strong, more market traders have begun betting that the Federal Reserve may only cut the benchmark federal funds rate twice this year, fewer than officials' latest interest rate dot plot forecast. The median of three rate cuts of 25 basis points. A few are even starting to bet that the Fed won't rule out keeping rates on hold this year.

Treasury yields, which are affected by interest rate expectations, have therefore risen. On Monday, the 10-year U.S. Treasury yield, known as the "anchor of global asset pricing," hit a year-to-date high of 4.464% during the session. Bond market shorts seemed ready to launch a move toward the 4.50% mark this week. impact.

CICC also lowered its forecast for the Federal Reserve to cut interest rates. CICC pointed out in its latest research report that since the beginning of this year, U.S. inflation has slowed down, the labor market remains strong, consumer spending is solid, and real estate and manufacturing are picking up. At the same time, financial conditions remained loose, corporate financing costs fell, and the stellar performance of the stock market supported the expansion of household sector wealth. From the perspective of economic fundamentals, the urgency and necessity for the Federal Reserve to cut interest rates has decreased. The Federal Reserve may have difficulty following its guidance of three interest rate cuts this year. As a result, CICC has lowered its forecast for the number of interest rate cuts to one, and the timing of interest rate cuts may be pushed back to the fourth quarter.

However, CICC also pointed out that this year is an election year in the United States, and it is difficult to predict disturbances from non-economic factors. The risk of the above prediction is that the Federal Reserve may cut interest rates earlier due to these factors. However, history shows that doing so can easily trigger "secondary inflation", adding complexity to subsequent economic and policy trends.

Betting on a rise in China’s stock market

On Monday, brokerage strategists at JPMorgan Chase, including Tony SK Le, issued a report saying that investors can consider buying lower-cost options to gain income from China's potential cyclical upturn.

The report shows that the above-mentioned brokerage strategists tend to buy options on the broad market index to prepare for a potential rebound in the Chinese stock market. Specific trading recommendations include buying H shares or FTSE China A50 narrow range call options, as well as buying call options on Chinese stocks, assuming the U.S. dollar does not fall against the offshore yuan.

Recently disclosed data shows that China's official manufacturing PMI and new orders index in March both rose to the highest level since March 2023, and the Caixin manufacturing PMI in March also rose to the highest level since February 2023, indicating the recovery of China's manufacturing industry. expansion.

Investors grew more optimistic about the world's second-largest economy after China's official manufacturing data hit its highest level in a year, the latest boost on the back of strong exports and rising consumer prices. Strong manufacturing, coupled with the return of foreign capital inflows and the Chinese government's determination to rescue the market, has helped the Hang Seng China Enterprises Index rebound 18% from January's lows.

The above-mentioned strategists pointed out that the implied volatility of China's major indexes (a measure of the future volatility of the underlying assets based on option prices) continued to decline in March. Large-cap indexes, particularly the HSCEI and FTSE A50, have implied volatility levels in the bottom quarter of their two-year ranges, they wrote.

In another sign of an improving outlook for investors, HSCEI's volatility bias also fell to its lowest level since 2017, suggesting less need for protection from a sharp drawdown.

JP Morgan strategists believe that it is still too early to jump into the market based on the judgment of improving economic activity. They prefer large-cap stocks that are supported by corporate buybacks and the "national team".

It is worth noting that many foreign investment institutions have recently made intensive statements and are bullish on Chinese assets. Yu Xiangrong, chief economist of Citigroup Greater China, released an analysis report on April 8, saying that Citigroup has recently raised China's GDP growth forecast this year from the original 4.6% to 5%, and it is expected that China's full-year growth target this year can be achieved.

At the end of February, Morgan Stanley issued a research report stating that factors such as changes in regulatory policy stance, support for the private sector, stabilization of the real estate market, and recovery in the price index are all boosting the recovery of the A-share market and attracting capital inflows. In early March, the China Equity Strategy Team of the Goldman Sachs Research Department issued a research report stating that it maintains an overweight rating on China's A-shares, predicting that the expected return of the MSCI China Index and the CSI 300 Index in 2024 is 10%, and the corporate profit growth rate is expected to be 8%. to 10%.