- Inflation and retail sales figures expected this week will likely show big headline jumps as the US economy accelerates.
- For investors, there is a risk that the Fed and economists underestimate the extent of economic growth and inflation, Bank of America said.
- BofA reiterated its underweighting in investment grade credit.
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Markets are at risk of inflation due to a rapid economic recovery developing in the US economy, with the Bank of America warning investors ahead of a wave of new economic data this week.
“… In our view, the risk is that investors will experience an acceleration in economic growth and inflation of a magnitude for which economists and the Fed are completely unprepared,” said Hans Mikkelsen, manager. of the high quality credit strategy at Bank of America, in the note. Bank of America reiterated its underweight stance in investment grade credit.
This week, investors will receive data on consumer prices and retail sales, providing a fresher picture of inflation and consumer performance last month against the backdrop of more stimulus money coming from the market. government and the rise of coronavirus vaccinations. Consumer spending accounts for about a third of the country’s economic activity.
On a fiscal basis, the US government has released $ 5,000 billion in financial assistance to help ease the shock of the pandemic. The combination of vaccines and stimulus has fueled expectations for the U.S. economy to continue to rebound from the virus-fueled recession that left it contracting 3.5% in 2020.
The consumer price index expected Tuesday could show a jump in headline inflation to 2.5% and core inflation to 1.6% in March, according to a consensus estimate by Econoday. Headline inflation in March 2020 was 1.5%. On Thursday, non-auto retail sales in March are expected to increase + 4.4% year-over-year, BofA said. However, he said his aggregate credit and debit card data supports his economist’s forecast of an “impressive + 11.4%” increase.
Consensus expectations for GDP growth started 2021 at a rate of 3.9% and have since increased to 5.8%, “but our economists are now at 7% and it seems the relevant risk is that they are they too weak, ”Mikkelsen said.
“While the markets are ahead of the implied consensus rate risk, we think they are still a long way from reflecting the reality of what’s to come. The Fed continues to argue that it has ample time to signal a tightening of monetary policy to the markets. But in our opinion, the reality is that the markets will not wait for the Fed, ”added BofA.
The S&P 500 Investment Grade Corporate Bond Index has lost around 4% so far this year, due to a massive sell off in Treasuries as investors seek riskier investments as the US economy improves. As bonds fall, an increase in their yields indicates an increase in borrowing costs.
The Federal Reserve has announced that it will keep benchmark interest rates close to zero until 2024, while investors predicted that the Fed’s rate hikes will begin at the end of 2022 at the earliest.
“We believe the risk of a rate shock will only increase over time and peak in late spring / summer as we approach collective immunity and return to normal,” Mikkelsen said.