Maintain curve-steepening and FX carry preferences while remaining alert to long-end rate and geopolitical risks

Overview

JPMorgan's global macro strategy report covers U.S. and international rates, FX, commodities, and emerging markets. Its core view is that, although recent declines in energy prices and weak U.S. employment data have pushed yields lower, Fed policy credibility, inflation expectations, term premia, and the U.S. Treasury supply-demand structure continue to put upward pressure on medium- and long-term U.S. yields. Strategically, it favors curve steepeners and FX carry while remaining cautious about geopolitical and energy disruptions.

Core views

For the United States, the report expects resilient growth and elevated core inflation in 2026, with the Fed raising rates once in December 2026; medium- and long-term Treasury yield forecasts are raised, and the 2-year/10-year curve steepener is maintained. In international rates, it remains cautious on Europe overall, but is bullish on 10-year German Bunds and favors them relative to U.S. Treasuries; it closes its long position in 10-year UK Gilts. In FX, it temporarily reduces most long U.S. dollar positions but retains a constructive dollar view, arguing that low volatility, improving growth, and interest-rate differentials favor carry strategies. In emerging markets, it maintains an overweight in EM FX and market weights in EM rates and sovereign and corporate credit.

Analysis framework

The report combines macroeconomic growth, inflation, and monetary-policy forecasts with assessments of yield-curve valuations, term premia, Treasury supply and demand, and investor positioning. Its FX views are constructed from rate differentials, valuations, growth momentum, volatility, and policy-intervention risks. Its emerging-market allocations are determined through model portfolios, valuations, and risk-adjusted returns.

Methodology notes

• Macroeconomic ForecastingGrowth, Inflation and Policy Rate Scenario Analysis

  Derives rate paths from economic growth, core inflation, unemployment, and central-bank reaction functions.

  The report forecasts U.S. real GDP growth of 2.0% year over year in the fourth quarter of 2026 and core PCE inflation of 3.5% year over year, leading it to conclude that further monetary tightening remains a risk.

• Rates StrategyTerm Premium and Curve Relative-Value Analysis

  Compares risk-adjusted carry, roll-down, and relative valuations across maturities.

  The report considers front-end Treasury carry more attractive and the belly expensive, while higher inflation expectations and term premia support a 2-year/10-year curve steepener.

• Text AnalysisFed Natural Language Processing Score

  Analyzes the hawkish-dovish bias and policy relevance of FOMC meeting materials and press-conference Q&A.

  The report's Fed NLP interpretation indicates that the meeting was overall more hawkish than in June, particularly in the Chair's remarks on the inflation target and the balance sheet.

• FX StrategyCarry and Procyclical Factor Framework

  Screens carry opportunities through rate differentials, growth momentum, valuation, and volatility.

  The report notes that global FX carry baskets have generated total returns of approximately 6%-12% year to date, and argues that strengthening procyclical signals continue to support the strategy.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• U.S. Treasuries

  Bearish on medium- and long-end yields; bullish on curve steepening

  Strengths

  The front end offers superior risk-adjusted carry; 2-year/10-year steepeners align with expectations for higher inflation expectations and term premia.

  Weaknesses

  The Treasury belly is relatively expensive; long-maturity yields are more sensitive to changes in supply and demand.

  Comparison

  Front-end carry is more attractive than in the belly; relative to Europe, the report favors 10-year German Bunds over U.S. Treasuries.

  Risks

  If FOMC members publicly counter the Chair's stance, bearish steepening could be constrained; unexpectedly weaker growth or inflation would also push yields lower.

• U.S. Dollar and Developed-Market FX

  Cautiously constructive on the U.S. dollar, with a preference for carry trades

  Strengths

  The U.S. dollar retains support from high yields, energy-exporter characteristics, and valuation; low volatility and divergent rate differentials favor carry.

  Weaknesses

  Successive weak employment and inflation data have not provided a catalyst for dollar strength, and the report has neutralized most long dollar positions.

  Comparison

  It favors short CHF against high-yielding currencies such as AUD, NOK, and the U.S. dollar; the yen remains relatively weak.

  Risks

  Limited Fed repricing, policy intervention, or a sharp deterioration in risk appetite could hurt carry trades.

• Japanese Yen

  Bearish on the yen

  Strengths

  Even in the event of coordinated intervention, the report considers it insufficient to fundamentally alter the yen's supply-demand dynamics.

  Weaknesses

  Intervention risk increases short-term volatility in yen crosses.

  Comparison

  The report considers CHF more suitable than the yen as a carry funding currency.

  Risks

  Faster Bank of Japan rate hikes, sustained coordinated intervention, or changes in Japanese institutional asset allocation could lead to yen appreciation.

• Emerging-Market FX, Rates and Credit

  Overweight FX; market weight rates and credit

  Strengths

  Procyclical growth and the carry advantage of high-yielding currencies support FX; macro fundamentals remain broadly constructive.

  Weaknesses

  Tight sovereign and corporate credit valuations limit scope for overweight positioning.

  Comparison

  The report favors COP, MXN, HUF, TRY, and CNY; it remains neutral on BRL due to election risk.

  Risks

  Energy shocks, global risk aversion, inflation, and two-way central-bank policy risks could all weaken performance.

• Natural Gas and Agricultural Commodities

  Monitor supply disruptions and warming positioning

  Strengths

  Continued disruption to transit through the Strait of Hormuz could constrain Qatar's liquefaction capacity and delay the recovery in supply.

  Weaknesses

  Energy markets are repeatedly affected by geopolitics, creating high directional uncertainty.

  Comparison

  Soft-commodity investor positioning has risen to a six-month high, driven mainly by ICE sugar shifting from net short to net long.

  Risks

  De-escalation in the Middle East, restoration of shipping, or demand changes could rapidly reverse supply premia and positioning dynamics.

Key data

• U.S. fourth-quarter 2026 GDP forecast2.0% (year over year)Report forecast.
• U.S. fourth-quarter 2026 core PCE forecast3.5% (year over year)The report considers inflation to remain sticky.
• Fed policy forecast25 basis-point rate hike in December 2026 to 3.75%-4.00%Report forecast.
• End-2026 U.S. 2-year Treasury yield forecast4.30%Report forecast.
• End-2026 U.S. 10-year Treasury yield forecast4.85%Raised from the prior 4.70%.
• End-2026 U.S. 30-year Treasury yield forecast5.40%Raised from the prior 5.20%.
• Year-to-date return of FX carry strategies6%-12%Performance of global FX carry baskets.
• Year-end USD/JPY target164The report maintains this target.
• U.S. fiscal deficit forecast$2.020 trillion in fiscal year 2026; $1.960 trillion in fiscal year 2027Report forecast.
• Additional Treasury supply to be absorbed by other investors$543 billionReport scenario calculation.

Impact & implications

If inflation expectations and term premia continue to rise, medium- and long-term U.S. bond prices will come under pressure and curve-steepening trades may benefit; a shift in Treasury demand toward more price-sensitive investors could keep yields elevated for longer. In FX markets, weak data constrain the U.S. dollar's upside, but high rate differentials and potential rate hikes still provide support; carry trades benefit relatively in an environment of low volatility and improving growth. Emerging-market FX may be supported by a procyclical environment, while rates and credit assets should remain balanced because valuations are tight.

Risks

• Renewed escalation or de-escalation in the Middle East could reshape global rates and risk appetite through energy prices.
• Uncertainty around Fed communication, the inflation target, and balance-sheet policy could cause adverse volatility in curve trades.
• Changes in U.S. Treasury auction sizes, fiscal deficits, and demand from overseas investors and commercial banks could alter the path of long-end yields.
• Coordinated yen intervention or faster Bank of Japan tightening could amplify carry-trade drawdowns.
• Emerging-market credit valuations are tight, and spreads could widen rapidly when risk appetite declines.

What to watch

• Whether U.S. employment, core inflation, and growth data again trigger stronger pricing for rate hikes.
• FOMC members' responses to relevant comments by the Chair, as well as policy signals on the balance sheet and the 2% inflation target.
• U.S. Treasury refunding guidance, auction sizes, and financing gaps beyond 2027.
• Marginal demand for U.S. Treasuries from overseas investors, commercial banks, bond funds, and pension funds.
• Transit through the Strait of Hormuz, Qatar's liquefaction capacity, and developments in the Middle East conflict.
• Whether the U.S. Dollar Index and USD/JPY approach the 164 target, as well as intervention signals from Japanese authorities.
• Growth momentum, inflation paths, and domestic political risks in high-yielding emerging-market currencies.