“The most recent increase of geopolitical and monetary policy risks puts our 2022 price targets at risk,” JPMorgan’s Marko Kolanovic said Friday.
For most of 2022, JPMorgan maintained a generally constructive, if increasingly cautious, view, predicated in part on the notion that central banks wouldn’t commit an egregious policy error while attempting to tame the hottest inflation in a generation.
With the Fed bent on what some, including Jeremy Siegel and Jeff Gundlach, worry may be an overzealous rates path, that notion looks increasingly tenuous. In fact, it’s not clear that Jerome Powell would view a deep recession as a mistake at all. Officials are avowedly prepared to countenance a downturn if it means slaying the inflation dragon. The only question is how deep.
“We’ve been tightening now for a while and the impact… is going to be cumulative into a recession,” Gundlach said last week. “I do think the Fed should be slowing down on these rate hikes.” For his part, Siegel said the Fed is now “talking way too tough.”
For Kolanovic, the risks of a policy mistake are rising materially. “We are increasingly worried about central banks making a policy error,” he said Friday, adding that JPMorgan is also wary of geopolitical tensions following “unprecedented” damage to the Nord Stream links, which European officials say was likely purposeful — the product of Russian “sabotage.”
“Since 2018 we have seen several errors that increased macroeconomic volatility,” Kolanovic lamented, citing over-tightening in Q4 of 2018, too much easing last year which culminated in “the crypto/NFT/innovation bubble” and “now again in 2022 with unprecedented tightening into a slowing economy and the war.”
The cracks, Marko cautioned, are starting to show, particularly in rates and FX. If central banks do commit an error, intentionally or otherwise, it’d have “global ” consequences, Kolanovic warned, adding that “even if a mistake is avoided, a delay will likely be introduced for the global market and economic recovery.”
As to the war, Kolanovic likened the Nord Stream escalation to the Cuban Missile Crisis. “The ramifications of this event are hard to fully assess,” he said, noting that tail risks have “significantly increased.” It’s now “very difficult to de-escalate” in the near-term,” he added.
The bottom line from Kolanovic is that the bank’s targets “may not be realized until 2023” or later, depending on when policy and geopolitical risks abate.
“Most of the risks in 2022 are a result of policies,” he went on to write, citing the “escalation of geopolitical tensions and violence, mismanagement of the energy crisis, damaging (instead of nurturing) of global trade relationships and supply chains, fanning internal political divisions and more.”
At the end of the day, Marko sighed, “it all amounts to throwing rocks in glass houses.”