Investors see a US recession ahead, sticky inflation, and more rate hikes from the Fed, JPMorgan says

Federal Reserve Chairman Jerome Powell.

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• Investors say high inflation levels won't allow the Fed to pull back on rate hikes, per JPMorgan. 
• Monetary tightening, along with profit-margin compression, will push the economy into a recession.
• "We do not see inflation providing the Fed an option for easing before a recession takes hold, and we maintain a risk bias toward a recession."

Investors are preparing for a recession and more interest rate hikes if inflation levels continue to stay high, according to JPMorgan.

Based on its survey of investors, the bank found that they expect monetary and credit tightening, along with profit-margin compression, will push the economy into a recession. Almost 90% of respondents see a recession materializing by the first quarter of 2024. 

 Meanwhile, the Federal Reserve continues to hike rates in a bid to combat stubbornly high inflation. Although, inflation rates have declined, they remain far above the Fed's 2% target.

"We do not see inflation providing the Fed an option for easing before a recession takes hold, and we maintain a risk bias toward a recession that starts later, with higher terminal rates across [developed markets] and a more synchronized global downturn," said the note, which published takeaways from JPMorgan's Investor Seminar earlier this month. 

This, on top of a tight labor market, gives policymakers reason to continue hiking. According to the CME FedWatch Tool, markets widely expect another quarter-point rate increase at the Fed's meeting next month with no more hikes after that. 

Although the Fed may have "have arrived late to the party," tightening will meet expectations, JPMorgan said.

"The peak Fed funds rate is likely within sight after 475 basis points of tightening over the course of 13 months," the note reads. "The risk of 'no normalization' and 'no landing' was highlighted, with financial disruption deemed as a greater near-term risk than recession."

Overall, investors are bracing for a greater downside as a result of the downbeat market conditions.

"Cash holdings are favored over global equities, USD high grade corporate bonds, commodities and DM government bonds hedged into USD, and nearly one-third believe that global equities will be the worst performing asset class in 2023," the note says.

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