Jamie Dimon Just Made A Shocking Interest Rate Prediction (Not What You Think)

Jeff Snider · Atlas Financial

No market signal of a sustained US inflation breakout; TIPS and rates don't price it.

Snider argues the market isn't pricing a sustained inflation acceleration. The TIPS market, inflation swaps and the yield curve show no convincing signature of an inflationary breakout. He says this doesn't mean reported inflation is near 2% or that every measure is falling. The point is that the market isn't pricing the kind of sustained acceleration that would support a new hiking cycle or a surge in market rates. He draws the same comparison to 2018, when TIPS and other inflation indicators also failed to match the inflation warnings Dimon was giving at the time.

“There is still no convincing market signature of any kind of risk for an inflationary breakout.”at 8:56

Jeff Snider · Atlas Financial

Market prices at most a couple more Fed hikes, not a full hiking cycle.

The front end of the Treasury curve is the key evidence. If investors expected a sequence of Fed hikes, the 2-year yield would rise decisively, especially relative to the 3-month bill. Instead the front-end slope remains restrained compared with 2017, 2018 and especially 2022. The market allows for perhaps one or two more hikes but does not endorse a massive sequence. A full hiking cycle like those of 2005-06, 2016-18 or 2022 would require an economy able to absorb higher costs and prices, and Snider sees no sign of that. The Treasury curve and credit conditions don't signal it either.

“The market may be allowing for the possibility of another [Fed] hike, maybe two more [Fed] hikes, but it is not endorsing a massive sequence.”at 9:38

Jeff Snider · Atlas Financial

Credit stress is building in leveraged and smaller borrowers; banks are growing more cautious.

Credit conditions don't point to the inflationary, booming economy that Dimon's rate warning implies. Snider says stress has been building among leveraged and smaller borrowers, that the credit cycle itself seems to be shifting, and that banks have become more cautious. He ties this to fragile consumer demand and to financial restraint that can slow price increases and economic activity even if the Fed does nothing. He also says banks and the broader system have been accumulating securities in a more defensive posture, consistent with less enthusiasm for risky lending.

“Stress has been building among leveraged and smaller borrowers. The credit cycle itself seems to be shifting. Banks have become more cautious.”at 10:02

Jeff Snider · Atlas Financial

The US economy is too fragile to produce the inflation and rates Dimon warns about.

Snider argues the market is signalling that the economy isn't strong enough to generate the inflationary track Dimon describes. Consumer demand is fragile, credit conditions are tightening, and banks are more cautious. Financial restraint can slow prices and activity even without Fed action. Snider sees the bond market as pricing weaker growth, while Dimon's warnings assume a strong nominal-growth environment that the data does not show.

“...it's saying that the economy just isn't strong enough to produce the inflationary track that Diamond is warning about...”at 10:26

Jeff Snider · Atlas Financial

Treasury yields may be peaking; September selloff fading and bond buyers returning.

The September bond selloff was largely calendar-driven. Treasuries seasonally sell off from late August into September, a mid-September funding bottleneck strains dealer balance sheets and repo, and long yields have often jumped in the second half of September right after that bottleneck (Snider's 'September cubed'). Once September ended, the 2-year fell from roughly 4.95% to about 4.75% in a week and has stabilized near 4.8%. Buyers returned to the 10-year and the curve began a modest bull steepening. Snider says one day or one week doesn't prove a peak, but the timing is suggestive. He also argues Dimon's rate warnings have repeatedly preceded reversals, citing 2018-19, 2002 and 2007, when yields rose on temporary factors and then fell. He expects yields could still rise a little in the short run, but he thinks the next sustained move in bonds is likely the opposite of what Dimon predicts.

“...that eventually the next move in bonds is the opposite of what he says.”at 22:16