“The ‘bad news is good news’ zone may be quite narrow,” JPMorgan analysts led by Marko Kolanovic said Monday.

Last week’s dramatic rally on Wall Street was facilitated by a sharp drop in long-end US yields. The bullish tone for bonds was set in motion by smaller-than-anticipated coupon increases in the refunding announcement, but softer macro data perpetuated the move, to the delight of an equity market that’s beholden to rates.

The problem with softer data is that, as Kolanovic put it Monday, “it is difficult to distinguish between a healthy slowdown and the initial stages of recession without the benefit of hindsight.” Late last month, Goldman’s David Kostin voiced similar sentiments, noting that “bad news cannot be good news for long.”

JPMorgan noted that markets are now anticipating “a full ease” by mid-2024, by which I suppose they mean one 25bps rate cut. Markets all but priced out another Fed hike last week.

In the wake of the November FOMC meeting and a run of cool data, market pricing suggested around 25% odds of a cut at the March Fed gathering.

“Recent developments seem to be catalyzing a shift away from higher-for-longer and are helping both bonds and risk markets amid price action that could be called Goldilocks/soft landing,” JPMorgan went on, while casting doubt on the notion that investors will be able to delineate between evidence of a benign downshift in macro momentum and early evidence of an outright downturn.

“Our bias would be to add some duration risk to our portfolio while maintaining a more defensive stance on risk markets,” Kolanovic reiterated. “Falling bond yields and the dovish central bank meetings are being interpreted by equity markets as a positive in the near-term [but] we believe that equities will soon revert back to an unattractive risk-reward as the Fed is set to remain higher for longer, valuations are rich, earnings expectations remain too optimistic, pricing power is waning, profit margins are at risk and the slowdown in top-line growth is set to continue.”