JPMorgan (NYSE:JPM) analysts have released new comments on the financial market outlook for 2024, with inflation and economic activity data forecast to moderate next year. The question is whether the investment strategy and whether risk assets should embrace a drop in inflation, leading to increased demand for bonds and stocks, or whether falling inflation signals a potential economic recession.
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The main concern stems from the interest rate shock observed over the past 18 months, which is expected to have a negative impact on economic activity. Furthermore, geopolitical developments pose challenges, affecting commodity prices, inflation, global trade and financial flows.
Despite these factors, the bank noted that risk assets are generally expensive to price. The bank’s forecast suggests the Federal Reserve could begin easing in the second half of 2024, perhaps at a pace of 25 basis points per meeting.
In a gradual economic downturn scenario, the decline in bond yields is expected to be led by the middle and eventually the short end of the yield curve. Forecasts also suggest that the US 10-year yield could fall to 3.75% next year, with the potential to fall further if the economy slips into recession. In this vein, JPMorgan sees a stronger dollar.
“Currency carry trades, which have attracted significant inflows and performed very well this year, are likely to deliver some of this performance or potentially ease in a strong risk-off scenario,” the analysts added.
“In commodities, precious metals have structural tailwinds and should benefit from risk appetite and subsequent monetary easing. Energy has significant upside, but economic weakness could dampen geopolitical and structural tailwinds.”
JPMorgan highlighted the difficulty in envisioning a sustained economic acceleration or increase in risks without a significant rate cut and a reversal of quantitative tightening.
“This is a forced scenario where risk assets cannot rise sustainably at this level of monetary constraint and there is likely to be no decisive easing unless risk assets adjust (or inflation falls due to weaker demand, for example), thereby hurting corporate profits,” the analysts added.
“This means we need to see some market declines and volatility first in 2024 before monetary conditions ease and a more sustainable recovery.”
Overall, JPMorgan is cautious about the performance of risk assets and the broader macroeconomic environment over the next 12 months. “Regardless of whether a recession occurs, the risk premium in equities and other risk assets is worse than in cash or bonds.”
Source: Investing
