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Merrill Managers: Fear Recession, Not Inflation

There were a few interesting tidbits in Merrill Lynch's global fund managers survey this month. The key points: managers think the dollar is too weak, the outlook for the U.S. economy is getting worse and inflation really isn't a growing problem.

Merrill Lynch says the global fund managers it surveyed in April were concerned about currency misalignment and more than half found the dollar "undervalued."

But when it comes to inflation, Merrill says it's a puzzle as to why managers in the survey are not more concerned.

Merrill says European investors were "relatively relaxed" about inflation despite rising commodity prices. In fact, European investors are moving away from commodity-based stocks as prices of oil and other commodities jump. Asian investors, too, were not fearful of inflation.

But in the U.S., where the crumbling dollar has paralleled a jump in commodities prices, there was an increase in concern about corporate earnings and the economy. There was not a huge change in inflation expectations from last month, though 5 percent now expect the CPI to go a lot lower in the next 12 months, compared to zero percent last month.

There was a big change in U.S. managers' expectations when it came to recession. Sixty-two percent said it is "fairly" likely the U.S. will experience recession over the next 12 months, compared to 35 percent who felt it was fairly likely in March. The number who believe a recession is "very" likely was 19 percent, compared to 12 percent in March.

The number who see recession as fairly unlikely plummeted to 14 percent, from 53 percent in March.

Of U.S. fund managers surveyed, 48 percent see CPI slightly higher in the next 12 months, while another 48 percent see it unchanged to slightly lower. If you go back to February, 25 percent then saw CPI going slightly higher, while 75 percent saw it slightly unchanged to lower in the next 12 months.

On earnings, U.S. fund managers surveyed by Merrill in April were more inclined to see double-digit corporate earnings growth. In fact, 43 percent said that is unlikely earnings can grow 10 percent or more in the next 12 months, compared to 29 percent last month and 17 percent in December.

The managers also saw expectations for earnings coming more in line with reality. On earnings expectations, 10 percent said current estimates are "far" too high, but that compares to 24 percent last month. Sixty-two percent now say earnings are "somewhat" high compared to to 53 percent in March.

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  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

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