In the most optimistic corners of Wall Street, they are promising inflation last week or hinting that the Federal Reserve may be on the safe side.
However, there is no such confidence among the big money managers, who are betting that the economic slowdown with the problems of hot prices will define the business next year.
With the closely watched portion of the Treasury yield curve sending new signs of recession, a recession is the consensus opinion among 92% of respondents in a recent Bank of America Corp. survey.
At the same time, Citigroup Inc. is charting a “Powell Push” scenario in which the Fed will be forced to hike even as growth picks up, while BlackRock Inc. they see no prospect of a soft landing in either the US or Europe.
The sharp decline comes as recent data on jobs and consumer and producer prices — combined with positive business earnings — suggests the U.S. central bank can succeed in its high-wire plan to raise borrowing costs without disrupting the economy.
For now, however, economists need to see concrete evidence of economic recovery before changing their defensive stance in the battered world of stocks and bonds.
“Central banks will expand and push the economy into a slow recession, but they will stop the hike – before they have done enough to reduce inflation – as the damage to prices is clear,” said Wei Li, a global market analyst. at BlackRock.
Li sees the slowdown in US growth, lower earnings and higher prices, justifying the company’s lower exposure to emerging markets and bonds, although it is willing to pay back some of the company’s debt. His sentiments are supported by investors at Bank of America, who see an increase on the horizon. The company’s latest research shows that it was very overweight – with the technology sector’s biggest decline since 2006 – and very overweight.
The skepticism contrasts with concerns raised by last week’s US inflation report which showed rising prices. This increases the argument that the Fed has room to reduce interest rate hikes.
The latter was summarily dismissed by a group of finance officials this week. Among the most hawkish, the President of St. Louis Fed, James Bullard, said that policymakers should increase interest rates to 5%-5.25% to stop inflation. The move came after San Francisco Fed President Mary Daly said a freeze on rate hikes was “out of the question,” while Kansas City Fed President Esther George warned the Fed would have a hard time keeping interest rates down without collapsing.
As prices rise in bear markets in stocks and bonds, the Fed has gone from a bullish friend to a new enemy. And no dovish policy pivot is in sight any time soon. Citi, for one, is proposing a “Powell Push,” a central bank led by Jerome Powell that has been forced to keep pace with rising inflation.
“We rate the environment as stagflationary,” according to Citi strategist Alex Saunders. He recommends selling US equities and debt, and buying stocks and bonds in a Powell Push scenario.
Invesco is also treading carefully, leaning toward defensive assets and betting heavily on Treasuries and US commercial debt.
“A ‘risky’ signal would be a sign that the Fed is about to ‘stop’ rate hikes,” said Kristina Hooper, chief global market strategist at Invesco.
Even Morgan Stanley’s Andrew Sheets – who has a narrow view that inflation will fall to 2.9% by the end of 2023 – is not ready to take any risk but on the prospect of a recession. However, he cites the mid-90s as reason for optimism. Back then, an era marked by high inflation and high interest rates, equities and Treasuries eventually managed to make big gains.
“Bears say soft landings are rare. But it happens,” wrote Papers in his opinion for next year.
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