‘Edge of a swamp’: JPMorgan strategist sees ‘one off sale’ in fixed income as US economy slows

Fixed income yields “all look good” and you may want to get some while you can, according to David Kelly of JPMorgan Chase & Co..

This is a “one off sale,” said Kelly, chief global strategist at JP Morgan Asset Management, on stage Monday afternoon at the Exchange event at the Fontainebleau hotel in Miami Beach, Florida. “Enter your fixed income positions now,” she said, as those yields “won’t be available” in a couple of years.

The Federal Reserve began rapidly raising interest rates last year in an effort to curb the rise in US inflation seen during the pandemic. The Fed had cut its key rate to zero in March 2020 during the COVID-19 crisis to help prop up the economy, and didn’t start raising it to deal with rising inflation until March 2022.

Now, the Fed rate is between 4.5% and 4.75%, while US Treasury yields are well above the levels seen even a year ago. But some investors expect the Fed to suspend its rate hikes — or even cut them — this year as inflation cools and the US economy slows.

The past three years have been an “incredible roller coaster,” according to Kelly.

The yield on the 10-year Treasury note TMUBMUSD10Y,
rose to 3.632% on Monday, while two-year yields TMUBMUSD02Y,
rose to 4.454% on the back of a surprisingly strong jobs report, according to Dow Jones Market Data. Bond yields and prices move in opposite directions.

“So we’re not in a recession right now,” Kelly said, but “we’re on the verge” of some kind of economic slowdown. While the US economy is not “on the edge of a precipice,” in her view, it is “on the edge of a swamp” that may not be deep but may be difficult to get out of.

“Consumer spending is set to slow down,” he said.

Meanwhile, the U.S. job market has so far remained strong despite the Fed’s aggressive rate hikes, with the unemployment rate falling to 3.4% in January, its lowest level since 1969.

See: The jobs report shows an increase of 517,000 US jobs in January

Kelly described the job market as “really weird”, with more job opportunities than unemployed job seekers. There is a “massive excess demand for labour,” he said, pointing to an insufficient supply of workers following a drop in immigration, baby boomers leaving the workforce and the long COVID that has led to nearly none of the people available to work.


The surprisingly strong January jobs report, released by the US Bureau of Labor Statistics on Feb. 3, showed signs of easing wage pressures. Average hourly wages fell 4.4% year-on-year in January. That’s below the US inflation rate, Kelly said.

Inflation, as measured by the consumer price index, climbed 6.5% in the 12 months to December, according to a Bureau of Labor Statistics report last month. CPI data for January is due on February 14th.

“All wage growth is doing is slowing the pace of inflation coming down,” Kelly said. Inflation measured by CPI data had reached 9.1% in June.

Instead of the dreaded wage “spiral,” in which rising wages help fuel further inflation, hourly earnings feel more like a “slinky” going down the stairs, Kelly said, referring to the spring toy.

He said he expects inflation to eventually return to 2% and expressed concern about the Fed continuing to tighten monetary policy in a slowing economy. “They’re tightening too much,” he said to her.

An economic scenario of low inflation and slow economic growth is generally “good for all financial businesses,” according to Kelly.

As for equities, he expects international equities to outpace the US in 2023.

International overweight?

“Nobody is overweight international because international has failed us for years and years,” Kelly said. “I think the international will beat the United States again this year.” International is “much cheaper” and pays better dividend yields, she said.

Both stocks and bonds tumbled last year on rising interest rates.

In 2023, iShares MSCI ACWI formerly US ETF ACWX,
which provides exposure to equities in developed and emerging markets but excludes the United States, rose 7.1% through Monday, according to FactSet data. This compares with a 7.2% gain for SPDR S&P 500 ETF Trust SPY,
during the same period.

Last year, the SPDR S&P 500 ETF Trust plunged 19.5%, sinking deeper than the 18.2% slide in the iShares MSCI ACWI former US ETF, FactSet data shows.

“Over the next few years, the dollar is expected to fall and amplify the return on international investment,” Kelly said.

Light: Why BlackRock prefers “select” stocks in emerging markets as the US dollar weakens

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