The evolution of inflation and changes in market expectations regarding future monetary policies are causing a change in the strategies of the main investment banks. One of the last to make changes to its roadmap is JP Morgan, in a report by its strategist Marko Kolanovic. The panorama it draws seems quite different compared to months ago.
Kolanovic comments throughout his latest analysis that the risks within the fixed income market have increased with the forecasts on interest rates. “With this context, we remain neutral on the duration of long-term US bonds, and see the risks to the dollar tilted moderately to the upside,” he highlights.
Eurozone bonds fell mainly on the back of the US data, due to weaker domestic activity data and comments from the ECB suggesting a convergence towards the start of the bearish interest rate cycle in June. This situation makes JPMorgan remain cautious. The idea is to avoid as many surprises as possible.
To make this x-ray Kolanovic is also based on the global macroeconomic scheme. Signs of further global growth remain limited, in his view. “Activity data still do not show a convinced revival of European or Japanese consumption or a rebound in global industrial production… However, the continued upward surprises in growth and constructive signs elsewhere point in the right direction,” conc . reta.
There is some clear evidence that would support his view that disinflation will stagnate at 3% during the first half of 2024. The growing confidence in his forecasts contrasts with the lack of conviction for the future. The prospect of continued high monetary policies for a long time will weigh on growth by straining financial conditions and increasing debt servicing costs.
“With tight labor markets supporting high wage increases, declining corporate pricing power and modest productivity gains should also compress profit margins for Wall Street-listed companies,” says Kolanovic.
“This erosion of the health of the private sector underscores our narrative that a slow-burning and gradual recession is underway… That is, we are facing the end of the cycle, although some recent events reinforce the arguments in favor of a scenario soft landing alternative,” he elaborates. The gum would stretch, but it would walk towards a dangerous precipice.
This scheme in which the equilibrium point is complex means that JP Morgan’s perspectives for the evolution of the stock market or for the credit market are moderate. Regarding equities, the entity believes that market volatility is being suppressed by the large supply of ETF options and they see alpha opportunities in India within emerging markets.
On the other hand, the credit market seems to have more challenges ahead. “It seems that the margin to invest now is narrower, since in the short term the market is driven by technical factors and there seems to be a shortage of bonds to meet demand,” describes the expert.
Regarding euro credit, he is not convinced that “this time will be different”, given that the supply is greater than expected and that the consensus is potentially stagnant after a series of good inflation data. “We are starting to feel uncomfortable, with spreads breaking what we thought was the floor and with stagnation in inflation data,” he points out.
Kolanovic analyzes five arguments to explain why “this time could be different.” Firstly, he emphasizes that returns are the only thing that matters. “Second, artificial intelligence will change the world; Third, the liquidity of intermediaries has improved; and fourthly, sovereign bonds are risky,” he analyzes. “As a final argument, private credit shows that capital markets are booming,” he adds.
Finally, the chief strategist of JP Morgan alludes to the next meeting of the cartel of oil countries and the effect it may have. “We expect the June OPEC+ meeting to be controversial, as it is likely that after June Russia will have to cut its exports to adapt to lower crude oil production,” he concludes.
