JPMorgan kicks off US earnings season tomorrow and that means we will hear from CEO Jamie Dimon. He's one of the few people in the world who can single-handedly steer global financial markets; and he's not afraid to share his views.
For a hint of what's coming, let's look at his recent comments. On the Q1 earnings call in mid-January, he said:
"The consumer is very strong. And it's all with respect to the fact that people suffering still, on COVID and all that. The fact is, despite of Omicron, in spite of supply chains, 2021 was one of the best growth years ever. And 2022, it looks like it either be 3.5% or 4%, which is actually pretty good.
"The consumer is $2 trillion more in their balance sheet, their home prices are up, asset prices are up, jobs are plentiful, wages are going up, which is good for them. You know what, we're not against that. And sharing the wealth a little bit of America's recovery with everybody so the consumer is in really good shape."
He still appears to believe that. In an April 4 shareholders letter, he said:
"Today's economic landscape is completely different from the 2008 financial crisis when the consumer was extraordinarily overleveraged, as was the financial system as a whole."
"During 2020 and 2021, many aberrant things also happened: 2 million people retired early; the supply of immigrant workers dropped by 1 million due to immigration policies; available jobs skyrocketed to 11 million (again unprecedented); and job seekers dropped to 5 million. Wage growth accelerated dramatically, particularly in low-income jobs. We should not be unhappy that wages are going up—and that workers have more choices and are making different decisions—in spite of the fact that this causes some difficulties for business."
"Consumer confidence and consumer spending have diverged dramatically, with consumer confidence dropping. Spending, however, is more important, and the drop in consumer confidence may be in reaction to ongoing fatigue from the pandemic shutdown and concerns over high inflation."
On interest rates, he was prescient earlier in the year predicting a much faster pace of rate hikes and rising yields. That's now the consensus view.
January:
"So you see the table is set pretty well with -- for the growth -- with obviously the negative being inflation and how that gets navigated and stuff like that. And so my view is a pretty good chance there'll be more than 4 [rate hikes], okay? it could be 6 or 7. I mean, I grew up in the world where you -- Paul Volcker raised up interest rates, 200 basis points, on a Saturday night. And this whole notion that somehow it's going to be sweet and gentle and no one's ever going to be surprised, I think, is a mistake. That does not mean we won't have growth. It does not mean unemployment but more to a good position and stuff like that.
So -- and the other fact is it may very well be possible that they're long rates, and I'm a little surprised how low they stayed. But the long rates may react more to the actual QE and then QT. And so one point, the Fed is going to be letting run off $100 billion or whatever number a month they're going to come up with. And then you may see loan rates react a little bit to that.
In April, he didn't touch directly on Fed policy but said his bank was ready for drastically higher rates.
"It is easy to second-guess complex decisions after the fact. The Federal Reserve (the Fed) and the government did the right thing by taking bold dramatic actions following the misfortune unleashed by the pandemic. In hindsight, it worked. But also in hindsight, the medicine (fiscal spending and QE) was probably too much and lasted too long.
"In today's economic environment, countries' central banks do not need to increase their foreign exchange reserves as they did after the great financial crisis, and banks don't need to buy Treasuries to improve their liquidity ratios. This time around, business investment will likely be higher, both because of higher growth and because the capital required to combat climate change is estimated to be more than $4 trillion annually. Finally, governments will also need to borrow more money—not less.
"This massive change in the flow of funds triggered by Fed tightening is certain to have market and economic effects that will be studied for decades to come. Our bank is prepared for drastically higher rates and more volatile markets."
I think that final point is a hint on what we get tomorrow. Dimon was right about inflation and a rising path of rates. If he doubles down on that sentiment, the market will listen and it will mean higher yields, lower stocks and a higher US dollar, particularly against risk-sensitive currencies like GBP and the commodity bloc.
