The weaker-than-expected CPI print for June prompted JPMorgan’s top quant to see “a modestly wider” soft landing path for the Federal Reserve.
“Core goods prices are now set to slow inflation in the face of manufacturing weakness and the removal of supply side constraints. However, accumulating evidence of an underlying shift in the inflation process—reflected in labor market tightness, wage- and price-setting behavior, and persistently high short-term expectations—suggests this disinflationary impulse will be limited,” JPM’s strategists wrote in a client note.
“We thus downplay near-term recession risks, while also expressing skepticism that a soft landing can be achieved in which inflation returns to central bank comfort zones on a sustained basis without a downturn.”
The strategists still expect the Fed to hike at the upcoming July meeting.
On equities, they see more downside for European equities relative to the U.S. with the next leg down “driven by a move lower in bond yields, as well as the earnings disappointments coming up.”
The strategists are also turning more cautious on China.
“The stimulus announcements could result in bounces, but we advise using these pockets of strength to reduce further. The region is sliding back into deflation and the property market will likely need a much more aggressive policy support to rebound sustainably.”