James Dimon has been stockpiling cash as he believes inflation is here to stay

18 Jun, 2021 01:45
source: Singularity Financial

Singularity Financial Hong Kong June 18, 2021 –  The stock market slumped after the U.S. Federal Reserve signaled that the first rate hike could come earlier than expected. Bank stocks, however, have been rising.

Investors’ risk appetite ebbed after Federal Reserve officials Wednesday gave the clearest signals yet of their plans to gradually pull back the monetary policies that helped propel markets to record highs. Their median projection showed they see lifting their benchmark rate to 0.6% by the end of 2023, sooner than previously forecast.

JPMorgan Chase & Co. Chief Executive James Dimon said at a financial conference this week, “I think you have a very good chance of inflation being more than transitory.”

JPMorgan has essentially been stockpiling cash and now has $500 billion of cash practically earning zero yield because Dimon is being patient, waiting for opportunities to reinvest cash at better rates. When you invest in securities, that money is typically locked in at the rate you invest in, so Dimon doesn’t want to lose any potential benefit when rates do start to rise. At the end of the first quarter of the year, JPMorgan estimated that the bank would reap an additional $6 billion in net interest income over the next year if the Fed raised the benchmark federal funds rate by 1 percentage point.

Based on JPMorgan’s cash hoarding and willingness to let the net interest income guidance drop by $2.5 billion as the bank had revised its guidance downward, Dimon likely thinks that either rate hikes could come sooner than expected, or maybe that inflation will push long-term rates higher by the end of the year, at which point reinvesting cash would make more sense. He said he hasn’t yet seen much evidence for loan growth, although at some point it likely has to happen.

Kerry Craig, global market strategist at J.P. Morgan Asset Management expects the Fed to start talking about plans to taper its current bond-buying program in September, and start scaling back early next year, followed by one increase in interest rates by the end of 2023.

“The Fed may have delivered a more hawkish message for markets than many would have expected,” Yeap Jun Rong of IG said in a report. Still, Yeap said, differing views among board members suggests “much will still depend on how the economic recovery will play out.”

“The key message is that we will not stay here forever,” said Florent Pochon, head of cross-asset strategies at Natixis. “The Fed really wanted to take the opportunity of the current window and the strong momentum to send the signal that it is ready to normalize, but it will be a difficult exercise if they want to avoid another taper tantrum.”

The S&P 500 has dropped 0.8% at 4214.94, while the Dow Jones Industrial Average has slumped 312.63 points, or 0.9%, to 33,986.70, and the Nasdaq Composite has slipped 0.7% to 13978.74. The 10-year Treasury yield rose 0.017 percentage point to 1.516% after being down about 0.001 percentage point at 1.491% before the announcement.

Asian stock markets followed Wall Street lower Thursday. Tokyo, Hong Kong and Seoul fell while Shanghai gained.