JP Morgan warns: Overvalued USD, loose policy & real private credit risk

A Sapphire Negroni will set you back US$36 in New York. The same drink in Sydney will cost you around US$19. That gap, according to J.P. Morgan Asset Management’s Andrew Norelli, is a surprisingly reliable indicator of one of the most contested macro questions in markets today.

Modelled on The Economist’s Big Mac Index, Norelli’s “Negroni Index” (his treasured treat after a long day of meetings) tracks purchasing power parity across every city he visits.

The verdict is unambiguous. The US dollar is overvalued.

It’s a disarming introduction into what will become one of the most forensically honest macro conversations you’ll hear this year. Norelli, who manages the JP Morgan Income Fund and sits on the firm’s global fixed income, currency and commodities group, isn’t one to side with the consensus. In fact, he seems to relish dealing out uncomfortable truths.

He believes the US neutral policy rate is actually 4% (not the 3% the market assumes), meaning the Fed’s 3.6% funds rate is already “inappropriately loose”. Rate hikes are far more probable in the US than markets are currently pricing in. The war in the Middle East is actually stimulative and inflationary. The distress in private credit is real - and the threat to over-leveraged borrowers is too - but there’s also a genuine opportunity emerging in the dislocation.

“Ordinarily, as a bond manager, you add high-quality duration to your portfolio to try and hedge those risks,” Norelli explains. “I’ll put my money where my mouth is right now. My fund is not in long-duration, and that tells you what I think of the prevailing correlation regime at the moment.”

In this interview, Norelli’s fresh (but brutal) takes on the market will blow your socks off. And there’s plenty to be bullish about too.

5 lessons from J.P Morgan Asset Management’s Andrew Norelli

1. The 60/40 portfolio isn’t dead

Bonds will still diversify stocks if the market is hit by an unforeseen shock (like if an asteroid hit Earth, for example). However, if rising bond yields are the reason behind the equity sell-off, bonds won’t save you. His own fund is currently short duration as a reflection of that view.

2. The new Fed chair is unlikely to deliver what markets want

Norelli believes that Kevin Warsch understands the structural constraints around shrinking the Fed's balance sheet. Even if Warsch personally wants rate cuts, he won't be able to bring the rest of the FOMC with him while the labour market remains strong.

3. Australian credit is genuinely attractive

Aussie corporate credit and bank hybrids are offering reasonably high yields without the FX risk of going offshore. Norelli acknowledged the regulatory phase-out of hybrids but said for now, the value is real. Coming from a US-based portfolio manager, that's a meaningful endorsement for local advisers.

4. Private credit distress is real but not systemic

Software companies represent 20–25% of private credit exposure and are dangerously over-leveraged. Credit events are coming. However, Norelli doesn't see contagion spreading to public markets.

5. Don’t confuse hard data vs. soft data

Consumer confidence is at record lows while the stock market sits at record highs. Norelli explains that more than half the US population feels politically uncomfortable, and that's showing up in survey data. But the hard economic data is actually improving. Advisers anchoring to sentiment surveys risk misreading the underlying economy entirely.

Today’s “charts of the week” demonstrate that agentic AI tools are massively increasing productivity, Norelli says. He argues that the risk that these tools lead to mass unemployment of white-collar workers is not economically coherent. Instead, he believes it will lead to increased prosperity and productivity for workers with “domain expertise”.

For example, software company XYZ goes bankrupt. A coder who once worked there now has two choices: They can go work for a client and design a bigger, faster, stronger, cheaper version of the software they had been making at company XYZ, or they can now build a product from the ground up with zero capital and no employees.

“The cost of entrepreneurship is dropping, and I can nearly prove that it’s happening,” Norelli says.

“One of the charts is the year-on-year growth in apps on the iOS store. I think it's up 74% year on year in January. And the other chart is new business applications in the US at a record level outside of the COVID rebound. And that's 2026 data … It is happening before our eyes, and that is incredibly good news for credit and for equities.”

But productivity growth is disinflationary, so the Fed will need to cut rates, right?

“Only the first part of that sentence is true,” Norelli says. “Productivity growth leads to rising neutral policy rates, and I'm pretty confident in that. But the good news is in those charts.”

In case you missed it, last week on Basis Points we were joined by Talaria Capital’s Chad Padowitz. He outlines why the market has become complacent about ballooning global debt, and why it could see policies shift to favour financial repression. In this episode, he explains how this could impact rates, inflation and the shares we buy.