Finally, Kolanovic said there is a growing risk that investors have returned to complacency when it comes to geopolitical tensions and potential energy market risks. Such complacency could lead to wild price swings if Russia ramps up its offensive against Ukraine or if tensions between China and the US escalate.
All of this equates to Kolanovic's recommendation that investors underweight their exposure to equities while getting overweight fixed income. "Risk markets are misaligned with policy and cycle. Duration is back to being attractive," Kolanovic said. And bonds could get even more attractive asdue to a resilient job market and consumer.
The terminal Fed Funds rate is now expected to hit about 5.4% later this year, representing another 100 basis point increase from current levels. Furthermore, the Fed could keep rates around that 5.4% level for longer than many are anticipating. That's a marked shift from expectations of rate cuts just a few weeks ago, and could keep strong downward pressure on the stock market. as solid economic data pushes off a recession, but also pushes off a rate cut from the Fed.
"Hot or warmish prints in the US, such as jobs, CPI, retail sales or services PMI, meant the odds of imminent recession had declined, but at the same time suggested rates must either get more restrictive or stay restrictive for longer," Kolanovic said.
Never seen a line item in a financial report that correlates its current valuation to an interest rate, past or future.
No surprise!
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