JP and Goldilocks
Firms are marking their calls to the market in typical global Wall St fashion. Everyone has been / remains steadfastly bearish of bonds hiding in shorter durations and calls for higher yields are far from something new. This time, though, it may be different — they may actually be right (and they may not) SO it’s now up TO the top firms on Wall St to make SURE you know how far ahead (behind, really) of the markets they are buy updating thought process of hikes and QT.
This from JPMs Feroli
… In light of these developments, we expect the Fed to lift off in March, with quarterly hikes thereafter. This would coincide with the conclusion of the taper process (which was recently accelerated at the December meeting). By implication, this pulls forward, in parallel fashion, our expectation for when balance sheet run-off will begin (we now suspect as soon as the July meeting)—which we already suspected was on an accelerated timeline relative to the 2014-17 episode and further suggested by clues in the recently released minutes.
This ‘new and original’ concept is not without risks. The very next paragraph,
However, in the short run, the rapid spread of the Omicron variant will weigh on consumer spending and economic activity. Already, there is a discernible drag in COVID-sensitive sectors—such as airlines, lodging, and travel and entertainment— and in states where case counts have risen most precipitously in the last few weeks. This drag, coupled with stronger-than-expected inventory gains last quarter, led us to adjust the profile of forecasted output growth in the first two quarters of this year. We now expect real GDP will expand by 1.5% saar in 1Q22 (down from 2.5%) and by 4.0% saar in 2Q22 (up from 3.5%). This reflects our view that the economic hit from Omicron—given its lower virulence and a tight labor market—will be relatively short-lived and less severe than Delta surges previously. Elsewhere, we see signs that supply chain bottlenecks are easing as we turn into the new year—the supplier deliveries index fell noticeably in both the manufacturing and services ISM surveys for December. Looking beyond Omicron, we expect that the economy will expand by nearly as much as we anticipated prior to our revisions, with full-year growth at 2.9% ($q/$q). Posing some downside risk to this forecast is the recent lapse in advance payments of the Child Tax Credit, which in recent months has provided additional support both income and consumer demand…
To say NOTHING of how it MAY actually generate a TAX BILL for many recipients. Can you imagine the look of surprise on their faces?
Will revisit this idea as tax day draws closer, I’m sure. In as far as Goldilocks latest, well, think much of the same ‘originality’ with latest note over the weekend,
Global Views: Earlier Runoff, Four Hikes
When the first reports about the Omicron variant emerged from South Africa in November, we cut our global GDP forecast moderately on the assumption that its economic impact would resemble that of the Delta variant earlier in the year. On balance, this still looks about right, as Omicron is even more transmissible than we had expected but also less severe. Moreover, both confirmed cases and hospital admissions are now on a downward trend not only in South Africa but also in London, the first place in the Northern Hemisphere to see a major outbreak. If this pattern holds up elsewhere, the economic impact should be largely behind us by the end of Q1, at least in the advanced economies.
…The combination of lower growth forecasts, rising inflation, and hawkish monetary policy signals has hit the equity market, modestly at the index level and more significantly in the highly valued technology sector. If the uptrend in bond yields slows in coming weeks, as our rates strategists expect, this might allow stock prices—which are often more sensitive to changes in bond yields than to their level—to recover some of their lost ground. In contrast to equities, spread markets have remained resilient to the greater market volatility so far, but our credit strategists remain broadly cautious and have, more specifically, moved to an underweight recommendation for agency MBS in view of the Fed’s upcoming balance sheet runoff. Finally, our FX strategists recommend longs in the Canadian dollar and shorts in the Japanese yen and Australian dollar, while our commodity strategists remain bullish on oil prices as fuel demand is set to recover from the recent Omicron-induced hit.
And now we know…