Happy hump day, readers. I'm senior reporter Phil Rosen, writing to you from Manhattan.
Today we're going over why some of the most astute voices on Wall Street are advising a shift from stocks to bonds — and what we learned yesterday helps explain why.
Tuesday's CPI data showed inflation climbed 0.5% in January, slightly higher than expected, and year-over-year it slowed to 6.4%.
The reading was nothing to call home about (sorry mom), but it suggests the whole "disinflationary" idea Jerome Powell has alluded to is going to be as straightforward as a squiggly line.
Prices, it seems, aren't cooling down as smoothly or quickly as anyone wants, especially the Fed.
Throw in January's red-hot jobs report, and the US central bank is staring down a real pickle — which could ultimately drag on investors' portfolios.
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1. Markets are acting like everything's fine, but everything isn't fine, according to JPMorgan's Marko Kolanovic.
Stocks' strong start to 2023 goes against Jerome Powell's insistence that more monetary policy tightening is still to come.
To Kolanovic, a recession is all but guaranteed if the Fed is serious about its 2% inflation target.
On Monday, the veteran strategist said he's "turning more defensive" on stocks, and he recommended that investors do the same as the recent rally hasn't priced in a downturn.
"With equities trading near last summer's highs and at above-average multiples, despite weakening earnings and the recent sharp move higher in interest rates, we maintain that markets are overpricing recent good news on inflation and are complacent of risks," Kolanovic said.
Judging by the upbeat direction markets have been moving, investors are behaving like the Fed's about to ease up on interest rate hikes.
"Problematically, equity and credit markets are aggressively fighting the Fed, with valuations only supported by assumptions of ample rate cuts," she wrote in a Monday note to clients. "History suggests these strategies often end in disappointment as cause and effect are conflated."
She said she likes short- to medium-term US Treasury notes, municipal bonds, and corporate credits, as well as equities that have the potential for above-average dividends.
All the while, there's a key recession indicator that's blaring louder than it has in roughly four decades.
DataTrek Research cofounder Nicholas Colas pointed out that the New York Fed's Recession Probabilities model, which is based on the spread between the three-month and 10-year Treasury yields, shows the odds of a recession in the next year are at 57%.
"No one seems to care, probably because Fed-induced recessions should have Fed-induced recoveries," Colas said.
What do you think of the January CPI report and does it impact your investment outlook for 2023? Tweet me (@philrosenn) or email me (prosen@insider.com) to let me know.
2. US stock futures fall early Wednesday, as investors pick over yesterday's CPI inflation report to assess what it means for the Fed. A reading on US retail sales is due later. Here are the latest market moves.
3. Earnings on deck: The Kraft Heinz Company, Cisco Inc., and more, all reporting.
9. Here's a list of 20 European stocks that can bring as much as 208% gains. BofA analysts said this batch of names has the best possible chance of outperforming in a complex environment — see the list.
