JPMorgan Bets on US Economic Resilience to Suppress Short-Term Bonds, Questions Warsh's Ability to Drive Rate Cuts

Stock News
02/13

JPMorgan Chase's strategy team has recommended shorting two-year U.S. Treasury bonds as a tactical trade, citing the country's solid economic growth outlook, which is expected to constrain the Federal Reserve from implementing significant interest rate reductions. The team, led by Jay Barry, noted in a report that robust U.S. economic fundamentals would make it difficult for Kevin Warsh, if confirmed as Fed chair, to steer the Federal Open Market Committee's decisions according to his own preferences. This perspective from the Wall Street giant comes ahead of a key U.S. inflation report scheduled for release this Friday, which may offer new clues about the Fed's future actions. Any signs of easing price pressures could boost demand for policy-sensitive short-term Treasuries. U.S. bond yields experienced sharp fluctuations this week, driven by a sell-off in technology stocks and strong employment data. Market participants are closely discussing how Warsh, nominated by Trump as the next Fed chair, would manage monetary policy. Traders currently anticipate a 25-basis-point rate cut by the Fed in July, followed by another reduction before year-end. Prior to the release of stronger-than-expected employment data earlier this week, markets had almost fully priced in a rate cut for June. During Asian trading hours on Friday, the two-year Treasury yield edged up 2 basis points to 3.47%, after falling approximately 5 basis points in the previous session. Some market participants hold contrasting views. Hedge fund manager David Einhorn has bet that the Fed under Warsh's leadership will cut rates "significantly more" than current market expectations. The co-founder of Greenlight Capital stated that he has purchased secured overnight financing rate futures, anticipating a rebound if the Fed implements substantial rate reductions. JPMorgan Chase forecasts that the U.S. core CPI for January, excluding food and energy, will show a strong month-on-month increase of 0.39%, driven by factors such as early-year price pressures and the fading impact of the government shutdown. Economists' average estimate aligns with market consensus at a 0.31% monthly rise. "We believe it is difficult for short-term yields to decline significantly from current levels," JPMorgan strategists concluded in their report.

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