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  4. Inflation is in its final stages and could soon roll over, causing bond yields to peak and stocks to stabilize, JPMorgan says

Inflation is in its final stages and could soon roll over, causing bond yields to peak and stocks to stabilize, JPMorgan says

Jennifer Sor   

Inflation is in its final stages and could soon roll over, causing bond yields to peak and stocks to stabilize, JPMorgan says
  • Inflation figures could soon rollover and disinflation may take hold, JPMorgan said Tuesday.
  • The bank pointed to four stages of inflation, with prices surging in commodities, then goods, then services, then wages.

Inflation is in its final stages and could soon roll over, JPMorgan said, noting that disinflation taking hold could cause bond yields to peak and stocks to gain footing after a year of massive volatility.

"We believe that the disinflation phase has already begun, and that inflation prints, both the headline and core, will be meaningfully lower in 3-6 months' time," analysts wrote in a note on Monday. The bank predicted headline inflation to clock in at 5.7% and core inflation to clock in at 5.3% in the first quarter of next year, compared to current figures of 8.2% and 6.6% respectively.

Inflation hits the economy in four phrases, JPMorgan analysts said, with prices first surging in commodities, then goods, then services, and finally in wages.

Commodity prices have already started to ease: metals and energy are down 20%-40% from highs earlier this summer, and natural gas, which has been a major driver of inflation in particular, has come down 67% since August.

Goods prices are currently showing signs of rolling over, with mixed corporate earnings showing wavering consumer demand for goods in the past quarter. That could soon be followed by service inflation, due to falling rents and improving supply-chain issues. Finally wages could start to ease, as fewer companies report plans of increasing wages over the next three months, according to a survey from the NFIB.

Those are all signs that the cycle of inflation is nearing the end. Combined with slowing growth, it could bring less pressure on the central bank to keep hiking rates, causing bond yields to peak and bring some relief to stocks.

"As economic activity has weakened closer to contraction territory, bond yields are likely to be capped by the subdued levels of growth from here. If the view of bond yields peaking gains traction, this would go a long way in helping the equity market stabilize," analysts said.

The bank's outlook comes as stocks have pared losses in the last month, with the equities just finishing out their best October ever and the best single month since 1976. But other market commentators have been skeptical of any rebound in the near-future. Top economist David Rosenberg warned in October that the recent stock rally was unlikely to hold up, and billionaire investor Jeremy Grantham said that market fundamentals were currently "as bad a package as we have ever seen."


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