April 9, 2024 : Jamie Dimon’s Interest Rate Warning and Economic Outlook: Inflation, Bonds, and the Future of AI
Jamie Dimon’s ‘8% Interest Rate’ Warning and S&P 500 Forecast
Despite Jamie Dimon’s warning that US interest rates could reach 8%, he forecasts that the S&P 500 index will reach 5535 points. This statement comes amid a backdrop where the yield on 10-year U.S. Treasury notes rose by 9 basis points (bp) on the 5th, followed by an additional 8bp increase to 4.464%, and 2-year notes reached a year-high of 4.79%.
This surge is attributed to the March job market report, which showed an increase in new jobs and a decrease in unemployment.Reduction in US Interest Rate Hike Expectations
Expectations for U.S. Interest Rate Increases Diminish
Expectations for a rate cut by the US Federal Reserve (Fed) are diminishing. Following comments by the presidents of the Minneapolis and Dallas Federal Reserve Banks, the probability of a rate cut in June, as seen in the Chicago Mercantile Exchange’s FedWatch tool, dropped from 66% to 48.7%. The anticipated extent of rate cuts for this year also decreased from 60bp, with two cuts expected to begin in September being the most likely scenario. These changes suggest a reduction in the market’s optimistic outlook for rate cuts.
Economic Analysts Revise Rate Cut Forecasts
Major economic analysis institutions such as PIMCO, Jefferies, and BNP Paribas have revised their forecasts, no longer expecting the Fed to cut rates three times this year. Citing strong labor markets, manufacturing expansion, and rising commodity prices, they point out that investors may be overly optimistic about policy easing. However, Goldman Sachs and Bank of America still expect three rate cuts starting in June.
Inflation and Rate Hikes
Wall Street anticipates that March inflation data will show a slight slowdown compared to January and February. Despite rising oil prices, the core CPI is estimated to have increased by 0.3% month-over-month, a decrease from February’s rate. However, continued high CPI figures could complicate the rate cut scenario..
New Observations on Neutral Interest Rates
Observations on the neutral interest rate are shifting. Loretta Mester, president of the Federal Reserve Bank of Cleveland, and former Treasury Secretary Larry Summers mentioned that the neutral rate might be higher than previously estimated. This reflects the U.S. economy’s strength and resilience, even with high interest rates, suggesting limited scope for the Fed to cut rates and a low likelihood of significant drops in bond yields.
Jamie Dimon’s Warning and Outlook on AI
Jamie Dimon, CEO of JPMorgan Chase, recently warned in his annual letter to investors that US interest rates could soar above 8% in the coming years. He analyzed that this situation could lead to high inflation due to massive fiscal spending and geopolitical factors.
Resilience of the Economy and the Danger of Fiscal Deficits
Dimon also pointed out that the current fiscal deficit is growing not as a result of a recession but during an economic boom, supported by unprecedented quantitative easing. He expressed concerns about the reversal of quantitative tightening.
Inflation and Stagflation
Dimon noted that continuous fiscal spending, structural changes in global trade, and increased capital demand due to the transition to a green economy are factors that will persistently drive inflationary pressures.
He argued that the market is overestimating the likelihood of a soft landing, suggesting a much lower probability in reality. He warned that the worst economic scenario could be stagflation and mentioned being prepared for the possibility of stagflation.
The Role of AI
On artificial intelligence (AI), Dimon predicted its impact would be as transformative as major technological inventions over the past few centuries, such as the printing press, steam engine, electricity, computer, and the internet. While the full impact of AI remains uncertain, he is confident it will be significant.
Global Uncertainty and International Order
Dimon pointed out that wars in Ukraine and the Middle East could further disrupt energy and food markets, immigration, and military and economic relationships. He highlighted the failure and weakening of the current international order, suggesting the need for a “new Bretton Woods system.”
The Bullish Trend in the Stock Market and AI Technology
Dimon’s letter heightened alertness towards inflation and interest rates, while his assessment of AI spurred a bullish trend in AI stocks. Mentions of Elon Musk’s “robo-taxi” announcement and the development of the xAI model “Grok” led to a surge in Tesla and AI-related stocks. Anticipation of new AI-related products or services at Google’s ‘Cloud Next’ conference resulted in a 1.43% increase.
UBS analyzed that demand for AI is appearing across a broader range of sectors and customers, suggesting that semiconductor and software stocks will offer significant opportunities to investors this year.
Earnings Season Forecast
As the first quarter earnings season approaches, S&P 500 companies’ profits are expected to increase by 3.2% year-over-year, marking the third consecutive quarter of growth. Financial sector performances may be weak, while consumer inflation expectations remain relatively stable, though expectations for rent have surged.
Financial Market Trends
Inflation Expectations
The New York Federal Reserve’s March consumer expectation survey showed inflation expectations to be somewhat stable. The one-year inflation expectation remained unchanged at 3.0% for three months.
The three-year inflation expectation rose slightly from 2.7% to 2.9%, while the five-year inflation expectation cooled from 2.9% to 2.6%. However, expectations for rent over the next 12 months jumped from 6.1% to 8.7%, drawing attention.
Oil Price Trends and Geopolitical Impacts
With increasing hopes for a ceasefire between Israel and the Gaza Strip, oil prices showed a downtrend. However, Yadani Research released an analysis suggesting Saudi Arabia might take measures to raise oil prices, continuing the speculation of a potential price increase.
Rising Bond Yields
In the New York bond market, yields on 2-year and 10-year notes increased. This rise is attributed to diminished expectations for rate cuts, strong economic and inflation indicators, and an influx of Treasury supply. Academy Securities and NewEdge Wealth forecasted that the yield increase would continue but also mentioned that it could present buying opportunities in the long term.
Surge in Gold Prices
Surprisingly, despite rising interest rates, gold prices continued their upward trend, reaching new highs. Bank of America analyzed this trend as indicating investors are preparing for an economic apocalypse. Gold is being used as a hedge against accelerated CPI rises, the risk of Fed rate cuts, and quantitative easing risks to support federal spending.
New York Stock Market and S&P 500 Index Forecast
The New York stock market maintained a range-bound trend amid rising interest rates. Wells Fargo raised its year-end S&P 500 index target to the highest on Wall Street, evaluating that despite the increased preference for risk assets, systemic risks have not reached their peak.
It recommended adjusting market forecasts based on the spread of investment-grade corporate bonds, inflation conditions, and continuous monitoring of 10-year yields. This reflects optimism that the stock market still has room to rise, especially in the latter half of this year.
