By Senad Karaahmetovic
Citi strategists see the case for a rebound in equities in case labor data softens. They believe that such a scenario could shift the market narrative to the recession, away from inflation/Fed.
“But in between peak inflation and peak recession, there might be a period of flux where risk can painfully squeeze higher, given short positioning. Obviously, if labour market data (and core CPI) remains strong, the Fed will remain emboldened to keep moving policy further into restrictive territory,” the strategists said in a client note.
The market “wants to price a Fed pivot,” they added. The strategists see potential for a further squeeze in equities, however only to a limited extent.
“We think earnings risk for equities and Fed pushback will keep risk rebounds capped. Our fundamental analysis suggests this should be faded,” they added.
On the back of this analysis, Citi also added a longer-dated dollar topside. The firm’s base–case scenario for EUR/USD is 0.93 and parity for GBP/USD.
“The USD performs substantially better in global recessions despite USRoW equity underperformance, as well as the Fed cutting more than RoW. Equities sell off more in a global recession, so safe haven flows dominate. In a US recession, USD performance is more symmetric and tracks Fed cuts more closely.”