Dear Friends,
J.P Morgan’s Global Strategists are predicting how the Russia-Ukraine war could affect the economy and when the next recession could arrive.
Here are their top 10 predictions:
1. U.S. unemployment may go even lower than 3.5%. While the Fed projected that the U.S. unemployment rate will fall from 3.8% in February to 3.5% by the end of this year (and stay at that level through 2024), JPM has predicted that the unemployment rate will go below 3.5% because there’s such an excess demand for labor right now.
2. The U.S. economy can handle the Fed’s rate hikes this year. The economy can take the 0.25% rate hike made by the Fed, on a short-term basis. But JPM is asking what it means in the medium term. The economy should be safe in 2022. But if the Federal Reserve keeps on raising rates during 2022, then by the end of the year there is a greater danger of some market weakness and economic weakness in 2023, when the economy will be out of capacity altogether.
3. There won’t be any additional U.S. stimulus money. According to JPM, it doesn’t look like there’s going to be any more fiscal stimulus. There may be a Bill that tries to pass the Congress this summer. But it will still need 50 votes in the Senate, and it does not look like Senator Joe Manchin is in favor of much more stimulus. It doesn’t quite seem right for the Federal Reserve to be busy slamming on the brakes while the federal government is pushing on the accelerator.
4. The volatile environment will continue for a long time. The slump in tech stocks, the Russia-Ukraine war and other challenges are all contributing to a very volatile environment – one that is likely to be volatile for some time.
5. Europe’s economy will be hurt by the war more than the U.S. The Russia-Ukraine war will likely hurt Europe much more than the U.S. economically. In Europe, they have the conflict on their doorstep and a significant risk of an energy squeeze within the region, which means JPM sees a couple of quarters of pretty flat growth during the course of this year.
6. There won’t be a recession this year. Counter to what you may be reading across the headlines, the JPM Global Strategists don’t think that a recession is likely.
7. Inflation will continue for a while. JPM is concerned about how inflation plays out. But it’s probably going to be with us for a while and that’s going to affect allocations for investors’ portfolios.
8. The negative real rate environment will continue through 2022. JPM is still seeing a negative real rate environment, which means the inflation rate is greater than the nominal interest rate.
9. The outlook for U.S. earnings growth is strong. JPM feels that the outlook for earnings in the U.S. is fairly solid. The U.S. has strong corporate balance sheets, with a sector mix that is well-diversified. But Europe is more challenged because of its greater reliance on the industrial sector there in terms of the equity market makeup. Europe is also being impacted by supply chain issues. JPM feels emerging markets, meanwhile, are “highly volatile” but there may be a little more interest in them in the future.
10. There is upside for interest rates. JPM can see some further upside to interest rates from here. But the curves have plainly flattened and they have already flattened aggressively in 2-year vs. 10-year notes. The JPM Global Strategists think rates will push up in the 10-year note, which will impact mortgage rates and other credit products.
Please reach out with any questions.
Debbie
