The JP Morgan View: Differing central bank decisions echo theme of high-for-long
Cross-Asset Strategy: The message received recently from DM centralbanks is that policy rates will need to remain high-for-long. This signal aligns with our Economists’ boiling-the-frog outcome, where resilience promotes sticky inflation and a need for sustained restrictive policy stances that, in turn, compress profit margins, erode balance sheet health, and bring an end to the expansion. Instead of getting hurt from higher input costs, most companies benefitted over the past two years, due to better mix and stronger pricing; however, this dynamic is at risk of reversal.
Bonds sold off again last week with the Fed having delivered a more hawkish hold than expected. We see Fed pricing as broadly fair with upside risks in the near term from long positioning and a potential government shutdown, so we stay neutral duration outright and keep 10s/30s steepeners. With the ECB having delivered its final hike in this tightening cycle intermediate maturity yields are likely close to peak levels, so we stay long via 5Y Germany and 2Yx1Y €STR swaps. The latest skirmish between credit valuations and fundamentals confirms our core thesis that in the battle between yields and spreads, it is yields that are winning. We believe that growth is a bigger risk than renewed rates volatility in Euro Credit, and so continue to look for HY/ IG decompression.
In FX, rates divergences are likely to sustain USD strength. Russia imposed a temporary ban on the exports of gasoline and diesel outside the Eurasian Economic Union, which we expect to last until harvest concludes in October.
JPM Clients’ View: Last week’s survey results indicated: (1) #equity exposure/ sentiment is ~45th percentile, on average; (2) 27% plan to increase equity exposure and 77% to increase bond duration; (3) 73% believe the ECB is done hiking; (4) a majority saw the Aug CPI report as neutral for Fed policy; (5) 58% expect Europe to face another squeeze on naturalgas this winter; (6) 56% see EV state subsidy investigations by the EU as simply a trade dispute rather than geopolitical.
Differing central bank decisions echo theme of high-for-long: In recent G4 CB meetings, the #ECB delivered a dovish hike, the #Fed a hawkish hold, the BoE a dovish pause, and the BoJ largely in line with expectations, while the overarching theme was high-for-long. Many are questioning the predictive power of the yield curve for recessions, but we are not so quick to dismiss yield curve signals. Upcoming Catalysts: Fed speak (all-wk); Lagarde speaks & IFO (9/25); US Consumer Confidence (9/26); BoT (9/27); Powell speaks, Banxico & German CPI (9/28); Euro & Japan CPI, (9/29); China PMIs (9/30); Caixin #China PMIs (10/1).