Comments from Jamie Dimon indicate that the market may not fully grasp the risks of rising US interest rates. He estimates a 40-50% chance of another rate hike, compared to the market’s lower estimate of 20%. Dimon highlighted factors like tariffs, immigration, and the US budget deficit as possible triggers for inflation. He also pointed out the challenges in understanding the current US economic data.

Rising Yields in the FX Market

In the foreign exchange (FX) market, higher yields have boosted the US dollar, especially against the Japanese yen (USD/JPY) during July. Key yield levels to monitor include 3.92% for 2-year yields and a weekly peak of 4.97% for 10-year yields. If 10-year yields exceed 5%, it could create anxiety in the stock market. However, 5.20% is viewed as the more critical threshold. The quieter summer market may influence these trends. The overall message is clear: higher US interest rates may be on the horizon, and current valuations might not accurately reflect this possibility. Dimon, well-informed about financial conditions, believes the likelihood of an increase is more like a coin toss than the market acknowledges. This gap is important, particularly for those involved in rate-sensitive investments.

Elements Influencing Inflation

Dimon isn’t just guessing about these numbers. When discussing inflation, we must consider long-term structural changes. Tariffs raise the price of imported goods, the impact of immigration on the labor market is uncertain, and increasing fiscal deficits may prevent inflation from easing as easily as many predict. The challenge lies not only in predicting the data but also in interpreting its meaning in real time. Mixed signals make it harder to make short-term decisions. Yields are responding accordingly. With 2-year yields at 3.92% and 10-year yields nearing 4.97%, the market is preparing for persistent inflation. The rise in yields has strengthened the dollar, leading to a boost in USD/JPY. This is expected due to the interest rate gap and recent comments from the Bank of Japan. A break above 5% in 10-year Treasuries could increase volatility in equities, with the 5.20% level being particularly significant due to its historical relevance. We’re currently in a quieter August, characterized by lower trading volumes and thinner liquidity, which often leads to exaggerated price movements from minor events. These quiet periods require patience, as there’s a delicate balance between being early and being wrong. Pay attention to how rate expectations change in the coming days. The gap between market pricing and policymakers’ indicated paths remains unresolved. Changes in futures positioning, short-term volatility, and options open interest may provide insights. Move carefully and precisely. Let others chase distractions; we will focus on where actual rate convictions shift. Create your live VT Markets account and start trading now.

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