LiveWire

Research shows stocks jump after inflation shows it has peaked. The key question for investors now is whether inflation has peaked.

Are you fearful of a recession in the next 12 months? That’s what BofA asked in its latest fund manager survey. Fears are high, near levels last seen in April 2020 and March 2009. Looking at the chart, these fears seem to be also correlated to stocks lows. In the survey, BofA found 42% of fund managers see a recession in next 12 months, up from 24% in February. And 80% of fund managers expect a stagflationary economy to persist. (economy remains stagnant amid relatively high inflation). Goldman Sachs, which is more positive than others, sees a 35% chance of a US recession in the next 12 months, up from 25% previously.

Fed fund futures are pricing cuts as soon as June. The question for the Fed is when do they start cutting interest rates, or at least according to futures. The chart is from Bloomberg, Lisa Abramowicz).

More than a dozen other central banks set policy in the coming week.
Economists predict rate hikes in the UK, Norway, Nigeria, and the Philippines, while Brazil and Turkey will probably hold, per Bloomberg. But what matters more is the Fed on Wednesday, for which we expect a 25bps hike. It will be critical to what the Fed communicates, on whether this could potentially be its last hike or perhaps not if it says inflation remains too hot patient from here. Some investors believe that the Fed may even not hike at all, considering the significant stress in the banking system. The Swiss National Bank is also anticipated to raise borrowing costs on Thursday. 

It has been our house view that tech would be the biggest beneficiary of the banking stress. But since SVB, Credit Suisse has created a larger risk, which has been reduced by now, thanks to the rapid coordinated actions of regulators. It reminds investors that regulators do not have the risk appetite to put the current system in danger. Treasury yields fell off a cliff and that is supporting tech stocks, boosting their valuation multiples. But also, earnings and newsflow continue to be strong, such as earnings for Adobe last night. Earlier we also had the news of more layoffs and cost reductions for tech mega caps Meta and Apple.