JPMorgan Chase has released a research report outlining its macro outlook covering global interest rates, foreign exchange, commodities, and emerging markets.
According to the report, the Fed Chair's recent remarks support a modest decline in short-end yields and a steeper yield curve, prompting the bank to maintain its long position in the 10-year versus 30-year U.S. Treasury curve steepener trade.
U.S. midterm election results could affect the dollar in different directions, but the overall policy impact is expected to be limited, and the relative outperformance of U.S. equities should continue to provide support for the greenback.
As long as there is no significant volatility shock or economic growth shock, wide global interest rate differentials should continue to underpin carry trades over the medium term.
In commodities, the bank is monitoring energy supply chain disruptions, downside risks to copper prices, and weather changes in South America.
Emerging markets face multiple challenges from energy prices, financing costs, and fiscal pressures.
Global Interest Rates
On U.S. rates, JPMorgan believes the Fed Chair's performance at the post-rate-decision press conference last week supports a modest decline in front-end yields and a steeper curve.
Given market expectations for the Fed's medium-term policy, the yield curve remains slightly flat at present.
If the U.S. Treasury does not make major adjustments to its debt management strategy, the yield curve should steepen. The bank therefore maintains its long position in the 10-year versus 30-year Treasury curve steepener.
Since the current curve trade resembles a low-beta duration long position, the strategy should benefit if the emerging weakness in risk assets spreads further.
In the November refunding announcement, JPMorgan expects forward guidance, nominal coupon auction sizes, and buyback volumes to remain unchanged.
The risk skews toward the Treasury reducing long-bond auction sizes, but the bank sees no reasonable justification for such a move at this time.
Last week, developed market (DM) rate markets showed mixed performance, with U.S. Treasury yields standing out relative to other markets.
Market focus remained on geopolitical developments and the continued weakness in technology stocks amid disappointing earnings.
In addition, central bank meetings (the Fed, ECB, BOJ, and RBNZ) and the U.K. budget announcement also drew market attention.
Foreign Exchange
The U.S. midterm elections will be held on November 3 local time.
A full Democratic sweep could be mildly bearish for the dollar, while an unexpectedly strong Republican showing that keeps the Senate could be bullish for the dollar.
Overall, JPMorgan expects that regardless of the outcome, the policy impact will be relatively limited, and the relative advantage of U.S. equities will persist, ultimately providing support for the dollar.
The carry trade pullback has widened further. While investors may have reason to reduce risk exposure to protect year-end returns, the medium-term outlook remains quite favorable as long as there is no volatility shock or adverse growth shock, because yield differentials between currencies remain wide.
JPMorgan remains bullish on high-yielding G10 currencies, including the Australian dollar, Norwegian krone, and U.S. dollar.
In emerging markets, however, the bank's strategists have become more cautious and are positioning more selectively.
For high-conviction carry trades, the bank prefers using the euro as a funding currency rather than the Swiss franc or Japanese yen.
G10 central bank meetings continue. The RBA, BOE, and Norges Bank outcomes will continue to support bullish views on the Australian dollar, British pound, and Norwegian krone, while the Riksbank is powerless to reverse the Swedish krona's weakness.
Commodities
JPMorgan notes that most of the global economy continues to grow, with many economies expanding above potential.
At the same time, however, oil consumption is contracting, with some regions declining at rates typically seen only during recessions.
Since the U.S. and Israel took military action against Iran and the Strait of Hormuz was effectively closed, Middle Eastern oil exporters have maintained energy shipments through bypass pipelines, alternative transport routes, dark-mode sailing, and ship-to-ship (STS) transfers.
In the copper market, while fundamentals remain broadly supportive, JPMorgan's discussions around copper last week shifted toward caution and uncertainty, with a focus on downside risks.
These risks center mainly on the U.S. delaying tariff action, which could cause some of the dislocation premium previously embedded in copper prices to fade.
After the recent sharp price decline, U.S. export sales have become more competitive, warranting continued monitoring.
Weather remains a key factor, especially in South America, where El Nino-related rainfall anomalies continue to intensify.
After the U.S. midterm elections, market attention will shift to the USDA's World Agricultural Supply and Demand Estimates (WASDE) report due on November 10.
Emerging Markets
JPMorgan says that as energy price and yield pressures continue to transmit to fiscal conditions, signs of stress are emerging in the market, volatility is rising, and growth expectations are being affected.
The bank's base case remains that a reflationary environment will continue to dominate, delivering further returns for emerging market FX carry trades.
However, the bank is reducing portfolio size, concentrating investments on the highest-carry currencies and opportunities with the strongest idiosyncratic drivers.
JPMorgan believes the room for further terminal rate repricing is facing some emerging constraints.
At the same time, the bank remains cautious on the long end of the yield curve, as fiscal concerns and supply-demand factors have not yet been fully reflected in curve steepening and asset swap spreads.
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