A surge in bond yields that has rattled global stock and currency markets has gone “too far,” leaving the door open for the Federal Reserve to stun investors with less hawkish policy and help engineer a soft landing for the economy, according to JPMorgan Chase & Co. strategist Marko Kolanovic.
“Friday’s strong CPI print that led to a surge in yields, along with the sell-off in crypto over the weekend, are weighing on investor sentiment and driving the market lower,” Kolanovic and his team wrote in a note to clients on Monday. “However, we believe rates market repricing went too far and the Fed will surprise dovishly relative to what is now priced into the curve.”
Kolanovic expects the Fed to lift interest rates by a half percentage point on Wednesday. His stance diverges from JPMorgan economists, led by chief US economist Michael Feroli, who said they expect the Fed to raise interest rates by 75 basis points at their meeting after a survey showed Americans’ inflation expectations rising.
Kolanovic, who was ranked the No. 1 equity-linked strategist in last year’s Institutional Investor survey, reiterated his view that the US stock market is poised for a gradual recovery in 2022 and the S&P 500 Index will likely end the year unchanged. But he hasn’t had much success with his calls so far in 2022, as he has repeatedly urged investors to buy the dip during this year’s steep stock market selloff.
A growing number of strategists disagree with Kolanovic’s optimistic view. Morgan Stanley’s Michael Wilson, who continues to be among Wall Street’s most prominent bears, sees depressed consumer sentiment as a key risk to the stock market and economy. Kolanovic, however, anticipates that US job growth will slow toward a 100,000 monthly pace later this year, which will likely force the Fed to moderate from its current pace of half-percentage point rate increases.
“The move in markets prices in more than enough recession risk, and we believe a near-term recession will ultimately be avoided thanks to consumer strength, Covid reopening/recovery, and policy stimulus in China,” Kolanovic and his team said.
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