BofA Survey Shows Stagflation Fears With No Fed Pivot in Sight

(Bloomberg) — Investors expect inflation to finally start falling next year, but they aren’t convinced that will coincide with Federal Reserve rate cuts, according to Bank of America Corp.’s latest fund manager survey.

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A record 85% of participants see global inflation declining over the next 12 months, according to the survey of 272 fund managers with $790 billion under management, which was conducted from Nov. 4 to Nov. 10 and closed before the release of October’s softer-than-forecast US consumer price data. Yet 92% expect a “stagflation” scenario, where growth continues to slow while inflation remains above average — a view that is now “overwhelmingly” the consensus, strategist Michael Hartnett wrote in a note Tuesday.

The survey also showed a majority of investors expect the Fed to stop hiking rates only when the personal consumption expenditures index — the central bank’s preferred inflation measure — falls below 4%. The latest reading of the gauge for September was 5.1%.

Global stocks have rallied since hitting a two-year low last month, fueled by optimism that easing inflation would prompt the Fed to stop raising rates at an aggressive pace. But some strategists have warned that such talk is premature as central bank officials have signaled scope for more hikes until there’s a meaningful decline in prices.

With sentiment still “uber-bearish” and investors’ recession expectations at the highest since April 2020, Hartnett recommends selling the S&P 500 above 4,100 points — about 4% higher than current levels. The pessimistic outlook kept fund managers most overweight cash and most underweight equities, the survey showed.

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The view on the UK appears to be improving as the share of investors underweight the country’s equities fell to 25% from 33%. Bank of America’s regional survey showed fund managers are bullish on European equities even as they see scope for the recent rally to fizzle out.

Other survey highlights include:

• Investors consider persistently high inflation, worsening geopolitics, hawkish central banks, a deep global recession and a systemic credit event as the biggest tail risks

• Participants expect bond yields to decline in the next 12 months for the first time in the survey’s history

• Most crowded trades: long US dollar, short China equities, long oil, short EU equities, long ESG assets and long T-bills

• Investors are most net underweight tech since August 2006, while being overweight in energy for an 18th straight month

–With assistance from Michael Msika.

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