JP Morgan's latest macro outlook: Stay positioned for a steeper US Treasury curve and high-yielding currencies; watch for divergence between oil supply and demand

Title context: JP Morgan's latest macro outlook: Stay positioned for a steeper US Treasury curve and high-yielding currencies; watch for divergence between oil supply and demand Text: In a research report released recently, JP Morgan provided its outlook on the macro environment, including global interest rates, foreign exchange, commodities, and emerging markets. JP Morgan believes that recent remarks by Fed Chair Warsh support a modest decline in short-end yields and a steeper yield curve, and therefore continues to hold a long position in the 10-year versus 30-year US Treasury curve steepener trade. The outcome of the US midterm elections could affect the dollar in different directions, but the overall policy impact is expected to be limited, and the relative outperformance of US equities is expected to continue providing support for the dollar. As long as there is no significant volatility shock or growth shock, large global interest rate differentials will continue to provide medium-term support for carry trades. In commodities, the focus is on energy supply chain disruptions, downside risks to copper prices, and weather changes in South America. Emerging markets face multiple tests from energy prices, financing costs, and fiscal pressures. Global Interest Rates On US rates, JP Morgan believes that the Fed Chair's performance at the post-decision press conference last week supports a modest decline in front-end yields and a steeper yield curve. Given market expectations for the Fed's medium-term policy, the yield curve currently remains slightly flat. If the US Treasury does not make major adjustments to its debt management strategy, the yield curve should steepen. Therefore, the bank maintains a long position in the 10-year versus 30-year US Treasury curve steepener trade. Given that the current curve trade resembles a low-beta long duration position, if the emerging weakness in risk assets spreads further, this strategy should benefit. In the November refunding announcement, JP Morgan expects forward guidance, nominal coupon auction sizes, and buyback sizes all to remain unchanged. The risk is tilted toward the Treasury reducing long-term bond auction sizes, but the bank sees no reasonable justification for such action at present. Last week, developed market (DM) rates markets performed mixed, with US Treasury yields standing out relative to other markets. Market focus remained on geopolitical developments and the continued weakness in technology stocks amid disappointing earnings. In addition, central bank meetings (Fed, ECB, BOJ, and RBNZ) and the UK budget announcement also drew market attention. Foreign Exchange The US midterm elections will be held on November 3 local time. A full Democratic sweep could be mildly bearish for the dollar; an unexpectedly strong Republican showing that keeps the Senate could be bullish for the dollar. Overall, JP Morgan expects that regardless of the outcome, the policy impact will be relatively limited, and the relative outperformance of US equities will persist, ultimately supporting the dollar. The carry trade pullback has widened further. Although investors may have reason to reduce risk exposure to protect year-end investment returns, the medium-term outlook remains quite good as long as there is no volatility shock or adverse growth shock, because yield differentials between currencies remain large. JP Morgan remains bullish on high-yielding G10 currencies, including the Australian dollar, Norwegian krone, and US dollar. In emerging markets, however, the bank's strategists have become more cautious and are positioning more selectively. In high-conviction carry trades, the bank prefers using the euro as the funding currency rather than the Swiss franc and Japanese yen. G10 central bank meetings continue. The outcomes of the RBA, BOE, and Norges Bank meetings will continue to support the bullish thesis for the Australian dollar, British pound, and Norwegian krone; the Riksbank is powerless to reverse the Swedish krona's weakness. Commodities JP Morgan notes that economies in most parts of the world continue to grow, with many growing even above potential. At the same time, however, oil consumption is contracting, with some regions shrinking at rates typically seen only during recessions. Since the US and Israel took military action against Iran and the Strait of Hormuz was effectively closed, Middle Eastern oil-exporting countries have maintained energy shipments through bypass pipelines, alternative transport routes, dark-mode sailing, and ship-to-ship (STS) transfers. In the copper market, although fundamentals remain broadly supportive, JP Morgan's discussions around the copper market last week shifted toward a cautious and uncertain stance, focusing on downside risks. These risks are mainly concentrated in the US delay in taking tariff action, which could cause some of the dislocation premium previously embedded in copper prices to fade. After the recent sharp price decline, US export sales competitiveness has improved, so related developments warrant continued attention. Weather remains a key factor, especially in South America, where rainfall anomalies associated with El Nio continue to intensify. After the US midterm elections, market focus will shift to the World Agricultural Supply and Demand Estimates (WASDE) report to be released by the US Department of Agriculture on November 10. Emerging Markets JP Morgan says that as energy price and yield pressures continue to transmit to fiscal conditions, markets are beginning to show signs of strain, with volatility rising and growth expectations affected. The bank's base case remains that a reflationary environment will continue to dominate, which will bring further returns for EM FX carry trades. However, the bank is scaling down its portfolio, concentrating investments in the highest-carry currencies and opportunities with the strongest idiosyncratic drivers. JP Morgan believes that room for further repricing of terminal rates is being constrained by some emerging limitations. At the same time, the bank remains cautious on the long end of the yield curve, because fiscal concerns and supply-demand factors have not yet been fully reflected in curve steepeners and asset swap spreads.