JPMorgan Research Analysis: Fed Rate Hikes and AI Shortages Drive the Next Investment Cycle

By Rita

JPMorgan expects the Fed to raise rates by 25 basis points in December, pushing the federal funds rate target range to 3.75%-4.00%. The erosion of the Fed's credibility due to inflation is driving the committee to take action. In early September, JPMorgan released its Global Market Outlook report, pointing out that the global economy is at the beginning of a new investment cycle.

JPMorgan forecasts US GDP growth of 2.0% in 2026, with core PCE inflation remaining at 3.5% and the unemployment rate stable at 4.1%. The divergence between market pricing for the policy path and the Fed's own projections is widening, which will serve as a major source of volatility in the coming quarters.

Rising Rate Hike Expectations, Curve Steepening Continues

JPMorgan expects the 2-year Treasury yield to reach 4.30% by the end of 2026, and the 10-year to reach 4.85%. The spread between the 2-year and 10-year bonds will widen to 55 basis points, continuing the steepening of the yield curve.

Inflation stickiness is the underlying logic. Core PCE will remain at 3.5% through Q4 2026, significantly above the Fed's 2% target. Inflation has been elevated for five consecutive years, substantially damaging the Fed's credibility. The committee needs to defend its inflation target with concrete actions. A 25-basis-point hike in December is the most likely path.

Divergence among global central banks is pronounced. JPMorgan expects the ECB to hold rates steady, the BoE may cut rates in early 2027, while the BoJ remains on a hiking trajectory. Policy space for emerging market central banks depends on their respective inflation paths and exchange rate pressures.

US Dollar: Range Break Imminent, Appreciation Window Remains

The DXY index is at a critical juncture. Historical experience shows that from roughly 6 months before the first rate hike to about 1 month after, the dollar's trade-weighted exchange rate typically appreciates by around 5%.

The market still holds a healthy size of USD long positions, far from extreme levels. If the Fed proceeds with a December hike as expected, the dollar could break out of its current trading range. Upside may be capped as synchronized tightening cycles by other global central banks partially offset the dollar's interest rate differential advantage.

JPMorgan forecasts the EUR/USD at 1.08, USD/JPY at 148, and GBP/USD at 1.28 by year-end 2026. The dollar retains support ahead of the hike, while the sustainability of the breakout will depend on the inflation trajectory and global growth divergence.

Commodities: Surprisingly Robust Oil Supply, Copper Prices Await Clarity on Tariffs

The oil market experienced the largest supply shock in history, yet price reaction was merely average. JPMorgan's commodities team notes that drawdowns were much smaller than expected, while demand destruction was much larger, creating an almost perfect hedge. Non-OPEC supply growth reached 2.44 million barrels per day, the strongest in a decade. Supply response speeds and scales from the US, Brazil, Canada, and Guyana exceeded expectations. China significantly reduced crude imports and adjusted refinery operations, with adjustments far surpassing market imagination. Oil demand may prove more resilient than traditional models assume.

The copper market remains in a wait-and-see mode. The chained weighted consumption terminal indicator for Chinese copper demand compiled by JPMorgan turned negative YoY to -5% in May. Persistent weakness in construction and high base effects for renewable energy installations prior to June 2025 continue to weigh. Grid investment also faced a high base in May, though YTD growth remains at 13%. JPMorgan expects base effects to gradually recede starting in June, leading to improved copper demand readings.

AI Compute Shortage May Continue to Exceed Expectations

Rental prices for older GPUs remain firm, indicating that the compute shortage is far from easing. Hyperscalers are likely to continue increasing spending, while sovereign AI projects and emerging AI data centers have just begun releasing additional orders.

If AI is an "existential" technology, there is still a long runway for upside in semiconductor spending. JPMorgan views AI capex as a supercycle lasting multiple years. As a core input for AI infrastructure, power is becoming the "new necessity." Global grid capex will accelerate, with European long-haul transmission demand set to grow significantly between 2023 and 2030. Order backlogs for Korean power equipment makers continue to climb. Rising nuclear's share in Asia's power generation mix is another area of focus.

Regional Markets: Two-Speed Economy and Localization Trends

Global earnings growth is polarizing. The breadth of earnings revisions is narrowing as synchronous upcycles unravel, with clear breaks appearing in YoY forward EPS growth across sectors. The earnings trajectory gap between AI-related and non-AI industries is widening.

JPMorgan recommends focusing on several long-term themes. Regarding robotics and industrial automation, domestic manufacturers' share in China's industrial robot market continues to rise. On defense spending expansion, global military expenditure as a share of GDP is rising, with robust growth in defense exports from South Korea and India. For Asian equity localization, markets with lower foreign trading participation may show greater resilience amid external capital outflows. Retail trading activity in China's onshore market remains persistently high, serving as a unique liquidity source in the global equity landscape.

JPMorgan believes the global economy is positioning itself for the next investment cycle. The foundation is solid, but inflation stickiness and policy uncertainty mean the path will not be smooth. AI compute shortages, power infrastructure investment, and regional market localization are the overarching themes running through the cycle.

Disclaimer

This article is a compilation and interpretation by Chaoxiang Research of a third-party broker research report (JPMorgan, September 1, 2026), combined with organized public market information. The ratings, price targets, earnings forecasts, and related judgments cited herein are opinions of the broker's analysts, representing only their institutional stance, not the views of Chaoxiang Research, and do not constitute any investment advice.

Market investments carry risks, and decisions must be made independently. This article should not serve as a basis for buying or selling any securities.