JPMorgan Co-Head of Macroeconomic Research Jahangir Aziz has characterized the US Federal Reserve's rate hike cycle as 'very aggressive', with markets already pricing in four rate hikes. According to Aziz's analysis reported by ET Now, this aggressive stance may not necessarily force emerging market central banks to follow suit. He noted that while coordinated rate hikes remain possible if inflation becomes globally synchronised, emerging markets historically have not moved in lockstep with developed-market central banks unless dealing with common global shocks.
Aziz emphasized that emerging markets do not necessarily have to follow the Fed's rate hike path, citing recent central bank actions as evidence. As reported by ET Now, while the Fed raised rates, Brazil cut rates by 25 basis points and Taiwan and Hungary held rates steady. He explained that emerging markets typically follow developed-market central banks only when hit by common global shocks, such as the global financial crisis or the synchronised inflation of 2022-23. Aziz noted that EM central banks generally respond to the Fed's impact on the 10-year rate and dollar-euro dynamics rather than following rate hikes directly.
The Middle East crisis has created significant oil supply disruptions, with Aziz estimating the world faces a shortage of 3.5 to 4 million barrels per day. According to ET Now reports, crude prices may need to rise into the $80-$90 range to balance supply and demand. Aziz explained that while disruption impacts have been partially absorbed through demand substitution and additional supplies from other countries, the market still faces substantial shortages. He noted that oil markets tend to react more sharply when inventories fall than when demand weakens, with reserves and inventory levels being key drivers of market volatility.
Aziz identified shelter costs and energy prices as the primary drivers of US inflation, with goods inflation not currently contributing significantly. As reported by ET Now, energy prices were expected to decline but have remained elevated amid the Iran war, while shelter inflation is closely linked to wage growth. He noted that US wage growth remains above pre-pandemic levels but has steadily declined from its pandemic-era peak. Despite sticky core inflation concerns, Aziz suggested a repeat of the sharp inflation spike witnessed in 2022-2023 may be difficult to justify based on current conditions.
Regarding US bond yields, Aziz noted that the 10-year US Treasury yield must be viewed in the context of expectations for future Fed rate hikes, with markets pricing in significant rate increases. According to ET Now, JPMorgan's economist Mike Feroli currently expects two more Fed rate hikes - one in October and another in December. On the US dollar, Aziz said JPMorgan expects some strength but not a sharp or disruptive rally, describing it as 'mild modest strength'. He noted that markets are already pricing in significant rate hikes from both the Fed and European Central Bank, making disruptive dollar strength unlikely unless there's a major change in monetary policy dynamics.
