JPMorgan warns on ugly coming value of stagflation – may cap bond good points (& weigh on USD)

JPMorgan Asset Administration is warning that even when the Fed begins chopping charges, a renewed pickup in inflation may forestall the type of bond rally traders may usually count on — and on the similar time, it may undermine the greenback.

• “The inflation temperature is about to rise”
• “For traders, the persistence of inflation would restrict potential capital good points on high-quality bonds, even with the Fed easing or in a weaker development situation”
• “It may additionally, in time, put additional downward stress on the greenback.”

The argument is:

• Inflation upturn threat – If value pressures re-accelerate, the Fed’s room to chop aggressively is proscribed, that means any coverage easing could be cautious and probably much less efficient in boosting growth-sensitive belongings.

• Bond market influence – Persistent inflation erodes the actual returns on fixed-income belongings. Even with fee cuts, long-duration Treasuries might not ship massive capital good points as a result of yields won’t fall a lot if inflation stays sticky.

• Foreign money implications – Larger inflation with out commensurate coverage tightening can erode actual rate of interest differentials in favour of the US, making the greenback much less enticing — significantly if markets see the Fed as behind the curve.

Briefly, JPM is highlighting a stagflation-lite threat:

• inflation stubbornly above goal,
• slower development,
• capped bond good points,
• and a softer USD over time

This text was written by Aaron Cutchburt at investinglive.com.