Citadel Securities: The next risk is the Fed being "forced to raise interest rates," which may arrive soon.

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A new threat is about to emerge in the market—this time coming from the possibility of the Federal Reserve returning to rate hikes.

On June 8 local time, Nohshad Shah, Head of EMEA Fixed Income Sales at Citadel Securities, wrote in a client report that the next major risk investors face is the tightening of financial conditions—the Federal Reserve may need to raise interest rates "soon" to suppress the accumulating inflationary pressures.

Shah pointed out directly in the report: "The most likely next move by the Federal Reserve is a rate hike... perhaps very soon."

This report was released after strong US employment data was announced. That day, both global stock and bond markets dropped, as the better-than-expected jobs report reinforced concerns that the economy's resilience is too strong for the Fed to keep rates unchanged. According to Bloomberg, after the data was released, the probability of the Fed raising rates by 25 basis points this year increased, with the likelihood of action in September approaching a 50/50 split.

Triple Pressures Drive Inflation Higher; Labor Market May Be at a "Turning Point"

Shah's judgement is based on three overlapping structural factors: a large-scale AI investment cycle, tightening energy markets, and a persistently strong labor market.

The labor market is the most immediate trigger among them. Shah believes the labor market may be approaching a "turning point"—with a low unemployment rate and limited labor supply, if economic growth accelerates further, wage increases could substantially exceed levels tolerable within the Fed's inflation target.

On the energy front, even if the situation in the Strait of Hormuz eases, inflationary pressures may not dissipate. Shah's logic is: The inventory consumed during the Iran conflict needs replenishing, and governments and corporations may take the opportunity to expand energy reserves and diversify supply chains—these actions will embed higher costs throughout the economic system, resulting in persistent inflation.

AI Political Backlash: An Overlooked Market Risk

Shah also raised a risk that currently receives little market attention: political backlash against AI.

As the US midterm elections approach this year, concerns over job displacement by AI, energy consumption problems, and its potential push on inflation are attracting more and more attention from policymakers.

Shah wrote in the report: "AI is unpopular, and inflation is unpopular. Unfortunately, any policy response to either one or both issues may dampen market enthusiasm for the AI theme and bring about broader tightening of financial conditions."

This means the risks facing the AI theme are not only from valuation or profitability, but may also stem from direct policy intervention.

Risk Disclaimer and Exemption ClauseThe market has risks, investors need to be cautious. This article does not constitute personal investment advice, nor does it take into account the specific investment goals, financial situation or needs of individual users. Users should consider whether any opinions, viewpoints or conclusions in this article suit their particular situation. Investing accordingly is at your own risk. ```