Interest rate hike, rather a sign of economic recovery?...J.P. Morgan "Stock market rally will go further"

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An analysis suggests that the rise in U.S. Treasury yields may be a sign of economic recovery rather than a damper on the stock market rally.

Jacob Manoukian, U.S. Investment Strategy Head at JPMorgan Private Bank, stated in an interview with CNBC on September 3 (local time) that the recent sell-off in the global bond market should not be viewed overly negatively. He explained that compared to early August, the U.S. 10-year Treasury yield has only risen by 5 basis points. The market is concerned about budget deficits, national debt, inflation, and the Federal Reserve's credibility. Manoukian said, “The bond market may be sensing a stronger growth environment in the short term.”

The improvement in artificial intelligence (AI) productivity was also cited as a reason for rising interest rates. This suggests that the economy can grow enough to handle higher interest rates. Manoukian expects the Federal Reserve (Fed) to raise interest rates one or two times over the next 12 months. However, he drew the line, saying, “One or two interest rate hikes do not change the investment environment itself.” He projected that while bond market volatility might increase when prices exceed targets, the stock market rally and corporate earnings growth could continue.

He also pointed out that high interest rates directly lead to increased living costs. High interest rates push up mortgage rates and freeze the housing market. He explained that Americans who do not feel the benefits of rising stock prices might develop a perception of being excluded from economic growth. Manoukian said that for investors, high interest rates are a means to curb inflation, but for the general public, high interest rates themselves can be perceived as inflation.

As a realistic way to lower the high U.S. debt-to-GDP ratio, he suggested nominal GDP growth. This is because spending cuts and tax increases pose significant political burdens for both parties. The logic is that by boosting nominal GDP growth, the debt ratio can be lowered while improving living standards and corporate profits. However, Manoukian pointed out that pursuing such policies would require accepting a certain level of inflation.

Japan was mentioned as an example showing the side effects of this policy. Japan's debt-to-GDP ratio has decreased from 220% five years ago to below 200% currently. This improvement in the ratio was attributed to inflation policies and expanded nominal GDP growth. On the other hand, the weakening yen led to recent interventions in the foreign exchange market. Manoukian believes that currency values may pay a price in the process of reducing the debt burden by leveraging growth and prices.

[Article Key Summary]

-JPMorgan Private Bank analyzed that the recent rise in Treasury yields may reflect not only fiscal instability but also strong growth and improved artificial intelligence productivity.

-It projected that even if the Fed raises interest rates one or two times over the next 12 months, the stock market rally and corporate earnings growth environment could be maintained.

-Nominal GDP growth was cited as a realistic means to lower the high U.S. debt ratio, but it was pointed out that the burden of inflation and currency value must be accepted.

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