Written by: Rita

J.P. Morgan expects the Federal Reserve to raise interest rates by 25 basis points in December, bringing the target range for the federal funds rate to 3.75% to 4.00%. The erosion of the Fed's credibility due to inflation is prompting the committee to take action. At the beginning of September, J.P. Morgan released a global market outlook report, indicating that the global economy is at the starting point of a new investment cycle.

J.P. Morgan forecasts that U.S. GDP will grow 2.0% in 2026, core PCE inflation will remain at 3.5%, and the unemployment rate will stabilize at 4.1%. The divergence between market pricing of the policy path and the Fed's own forecasts is widening, which will be an important source of volatility in the coming quarters.

Expectations for Rate Hikes Heat Up, Yield Curve Steepens

J.P. Morgan expects the 2-year Treasury yield to reach 4.30% by the end of 2026, and the 10-year yield to reach 4.85%. The spread between the 2-year and 10-year yields is expected to widen to 55 basis points, continuing the steepening of the yield curve.

The stickiness of inflation is the underlying logic. Core PCE is expected to remain at 3.5% by Q4 of 2026, significantly above the Fed's 2% target. Inflation has been persistently high for five years, substantially damaging the Fed's credibility, and the committee needs to take concrete actions to defend the inflation target. A 25 basis point rate hike in December is the most likely path.

The divergence in the global central bank landscape is evident. J.P. Morgan anticipates that the European Central Bank will keep rates unchanged, the Bank of England may cut rates in early 2027, and the Bank of Japan remains on a rate hike trajectory. The policy space for emerging market central banks depends on their respective inflation paths and exchange rate pressures.

U.S. Dollar: Range to Break, Appreciation Window Still Open

The U.S. Dollar Index is at a critical juncture. Historical experience shows that, in the approximately six months leading up to the first rate hike and about one month after, the trade-weighted U.S. dollar exchange rate tends to appreciate by about 5%.

The market still holds a healthy level of long positions in the dollar, not reaching extreme levels. If the Federal Reserve raises rates as expected in December, the dollar may break through its current trading range. Upside potential may be limited, as other central banks around the world are also tightening their policies, partly offsetting the dollar's yield advantage.

J.P. Morgan forecasts that by the end of 2026, the euro will be at 1.08 against the dollar, the dollar will be at 148 against the yen, and the pound will be at 1.28 against the dollar. The dollar still has support before rate hikes, and the sustainability of a breakthrough depends on the inflation path and global growth divergence.

Commodities: Strong Unexpected Oil Supply, Copper Prices Await Clarity on Tariffs

The oil market has experienced the largest supply shock in history, yet the price reaction has only been average. J.P. Morgan's commodities team points out that inventory depletion is far less than expected and demand loss is much greater than expected, creating an almost perfect hedge between the two. Non-OPEC supply growth has reached 2.44 million barrels per day, the strongest in a decade. Supply responses from the U.S., Brazil, Canada, and Guyana have exceeded expectations. China has significantly reduced oil imports and adjusted refining operations, with adjustments far beyond market expectations. Oil demand may be more elastic than traditional models assume.

The copper market is in a wait-and-see state. J.P. Morgan's weighted demand index for Chinese copper consumption turned negative in May, with a year-on-year change of -5%. The construction sector remains weak, and renewable energy installations face an extremely high base before June 2025. Grid investment also faces a high base in May, maintaining a 13% year-on-year growth since the beginning of the year. J.P. Morgan expects the base effect to gradually fade from June, and copper demand readings will improve.

AI Computing Power Shortage May Persist Exceeding Expectations

Leasing prices for older GPUs remain high, indicating that the supply-demand imbalance for computing power is far from alleviated. Large-scale firms are likely to continue increasing spending, and sovereign AI projects and emerging AI data centers have just begun to release additional orders.

If AI is an "existential" technology, the upward space for semiconductor spending still has a long way to go. J.P. Morgan views AI capital expenditure as a supercycle that will last for many years. Electricity, as a core input for AI infrastructure, is becoming "a new essential commodity." Global capital expenditure on the power grid will accelerate, with long-cycle transmission demand in Europe significantly increasing between 2023 and 2030, and order backlogs for South Korean power equipment companies continuing to rise. The increase in the share of nuclear energy in Asia's generation structure is another trend worth noting.

Regional Markets: Two-Speed Economy and Localization Trends

Global profit growth is showing bifurcation. The breadth of profit revisions is beginning to narrow, the synchronized upcycle is breaking down, and there are significant disconnections in year-on-year growth rates of forward earnings per share between different industries. The gap between AI-related industries and non-AI industries in earnings trajectories is expanding.

J.P. Morgan recommends focusing on several long-term themes. In robotics and industrial automation, the share of domestic manufacturers in China's industrial robot market continues to rise. Regarding defense spending expansion, the global military expenditure as a percentage of GDP is increasing, with strong growth in defense exports from South Korea and India. In the localization of Asian stock markets, markets with a low share of foreign investment trading may exhibit greater resilience in the face of outflows of external funds. Retail trading activity in China's onshore market remains high, becoming a unique source of liquidity in the global equity market.

J.P. Morgan believes that the global economy is positioning itself for the next investment cycle. The supporting fundamentals are solid, and the stickiness of inflation and policy uncertainty mean that the path will not be smooth. The shortage of AI computing power, investment in power infrastructure, and localization of regional markets are the main threads throughout the cycle.

Disclaimer

This article is a compilation and interpretation by ChaoXiang Research of the third-party brokerage report (J.P. Morgan, September 1, 2026), combined with整理 of public market information. The ratings, target prices, earnings forecasts, and related judgments quoted in the text are the views of the brokerage's analysts, representing only the position of their institution and do not reflect ChaoXiang Research's views, nor do they constitute any investment advice.

Markets involve risks, and decisions should be made independently. This article should not be used as a basis for buying or selling any securities.