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JPMorgan analyst Marko Kolanovic told investors in a note Monday that declining inflation and very low investor positioning will support a further recovery in markets.
The analyst also maintained their stance that inflation will resolve on its own as “distortions fade, and likely drive a Fed pivot, while a stronger H2 recovery in China should provide support for the global cycle.”
“This, in combination with still very low investor positioning, creates a positive environment for cyclical assets. We stay tactically neutral U.S. duration given low liquidity and August seasonals, while a challenging European growth backdrop is causing divergence between ECB and Fed, keeping us long 5y Germany vs U.S. and short 10y Italy vs Germany,” wrote Kolanovic.
The analyst explained that persistent inflation leads them to price additional hikes in the U.K., while they see Euro credit as expensive after rallying with falling yields as a tailwind over the summer.
However, for the U.S., “incoming CPI releases (e.g. recent declines in gasoline, airfares, used cars, etc.) continue to support our call for a large but uneven fall in 2H22 inflation.”
“The largest disinflationary impulse is expected to come in the U.S. followed by EM, while Europe inflation will remain higher due to Energy prices. EM central banks are likely to prove more sensitive to easing headline inflation and we see scope for a dovish pivot to continue to unfold in coming months. China can be desynchronized in terms of their business and earnings cycle, acting as a buffer to headwinds from Europe. Additionally, U.S. midterm elections could be a positive catalyst for risk assets in Q4.”
