Inflation will resolve itself as Fed pivot looms

  • Inflation will subside as the distortions of the pandemic fade, according to JPMorgan’s Marko Kolanovic.
  • The bank said lower inflation should help lift the stock market.
  • “The Fed overreacted with a 75 basis point hike. We’ll probably see a pivot from the Fed,” Kolanovic said.

Inflation will subside and drive the stock market higher as oil prices fall and supply chain bottlenecks resolve, JPMorgan’s Marko Kolanovic said in a Monday note.

Inflation has accelerated over the past year and has been a major concern for investors and the Federal Reserve. Four-decade highs in US inflation have led to back-to-back outsized interest rate hikes this year in an effort to rein in rising prices.

But Kolanovic is concerned about Fed Chairman Jerome Powell’s overreaction with another 75 basis point rate hike next month, and said the Fed should eventually walk away from those outsized rate hikes. . Current market expectations suggest that the Fed will raise interest rates another 75 basis points at its September FOMC meeting.

“We maintain that inflation will resolve itself as distortions fade and the Fed has overreacted with a 75 basis point hike[s]. We will likely see a pivot from the Fed, which is positive for cyclical assets,” Kolanovic said.

That, combined with a second-half recovery in China, the absence of a global recession, and very bearish positioning among systematic and discretionary investment funds, gives Kolanovic confidence in his S&P 500 year-end target of 4,800. A push towards these levels represents a potential upside of 16% from current levels.

And the Fed has little incentive to make big interest rate hikes just before the US midterm elections, Kolanovic added.

“Given the lead time needed for rate hikes to work through the system and with just a month before a very important US election, we believe it would be a mistake for the Fed to increase the risk of a hawkish policy error. and endanger market stability,” Kolanovic said. Explain.

A policy-no-mistake Fed means a soft economic landing is very much on the cards for the United States, though JPMorgan sees little potential for that to happen in Europe as oil prices energy are soaring and inflation remains high.

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