Global Markets Strategy15 January 2024J P M O R G A Nwww.jpmorganmarkets.comEquity StrategyMislav Matejka, CFA AC(44-20) 7134-9741mislav.matejka@jpmorgan.comJ.P. Morgan Securities plcPrabhav Bhadani, CFA(44-20) 7742-4404prabhav.bhadani@jpmorgan.comJ.P. Morgan Securities plcNitya Saldanha, CFA(44 20) 7742 9986nitya.saldanha@jpmchase.comJ.P. Morgan Securities plcKarishma Manpuria, CFA(91-22) 6157-4115karishma.manpuria@jpmchase.comJ.P. Morgan India Private LimitedWe think that the downmove in bond yields that took place since October could consolidate...3.2%3.4%3.6%3.8%4.0%4.2%4.4%4.6%4.8%5.0%5.2%Jan 23Mar 23May 23Jul 23Sep 23Nov 23Jan 24US 10Y bond yield...post the likely pause, for the next leg lower in yields we believe one needs to see activity weakness… tentative signs of labor softening are coming through...303540455055606598020610141822US RecessionUS Services ISM - Employment...Cyclicals are significantly ahead of Defensives relative to the strength of the economy…. catchup is likely-30%-20%-10%0%10%20%30%03040506070809101112131415161718192021222324RecessionsMSCI US Cyclicals vs Defensives, %y/yUS ISM Manufacturing , %y/ySource: Datastream, IBES, J.P. Morgan.•The question is whether the move lower in bond yields is over for the time being, and can it resume further down the line without a clear bout of activity weakness materializing? We called last October to position for the rollover in bond yields – see “Enter long duration trade�, but have at the start of this year argued that tactically there is likely to be a consolidation in the downmove in bond yields – see January Chartbook.•The fall in bond yields from October highs was sharp, with the US 10-year yield down 100bp in 3 months to current levels, and down 120bp to recent lows. Central banks rate projections have already moved substantially, now pricing in a cumulative 150-170bp of cuts by the Fed and ECB over the next 12 months, and markets digested a raft of benign inflation prints, which resulted in a move lower in inflation forwards.•Big picture, we believe that long duration call will stay relevant for 2024, but one is likely to see a pause first, and technically there is even a risk that bond yields bounce, on the exhaustion in negative convexity impact, on potentially more longer dated government bond issuance, and along with likely some more mixed inflation prints ahead. In our view, we are unlikely to see another leg lower in bond yields near term unless or until there is a clear deterioration in activity dataflow. Our US Fixed Income team has 3.95% end Q1 projection for 10-year, flat from here, and 3.65% for end year. •Now, what could be the implications for equity markets of this? Clearly, in November and December equities took the fall in bond yields as an overwhelming positive, fueling a risk-on market rebound. BKX was up 30%, Cyclicals outperformed Defensives, with the excepti...
