Inflation, not Covid, is now the biggest 'tail risk' for markets, Bank of America survey says

Published Tue, May 18 20219:20 AM EDTUpdated Tue, May 18 202111:00 AM EDT

Despite assurances from the Federal Reserve that the current spate of price increases is temporary, professional investors see inflation as the biggest threat to their portfolios, according to the closely watched Bank of America Global Fund Manager Survey. A record 69% of respondents to the monthly reading see above-trend growth and inflation as the most likely scenario ahead. What's more, inflation is seen by 35% as the biggest "tail risk," or unlikely event that could cause substantial damage. Only a few months ago, the Covid pandemic was seen as the biggest tail risk – now just 9% of managers view it that way, ranking it behind a Fed-related "taper tantrum" in the bond market (27%) and an asset bubble (15%). In all, a net 83% of investors see inflation higher in the next 12 months. While that's a 10 percentage point decline from a month earlier, it is "still extremely high," said Michael Hartnett, Bank of America's chief investment strategist. The inflation views come amid signs of rapidly escalating price increases across a variety of sectors. The consumer price index for April showed a higher-than-expected 4.2% gain from a year earlier, led by substantial gains in energy, used cars, airline tickets and a slew of other factors. Still, the Fed's preferred measure, the core personal consumption expenditures price index, increased just 1.8% in March, below the central bank's 2% objective. Fed officials have insisted that the rise in inflation numbers otherwise is largely due to comparisons to a year ago when a large swath of the economy shut down due to the pandemic, as well as transitory factors such as supply bottlenecks and the Colonial Pipeline hack. Fed officials associate a certain level of inflation with positive economic growth, and they have said they will allow inflation to run above the 2% mark for a period of time in hopes of getting the labor market back to full health. "I really take the inflation as a sign of a healthy economy," Atlanta Fed President Raphael Bostic told CNBC on Monday . "There's growth, there's innovation, there's value-add that's being provided, and that in turn should result in better fortunes for basically everybody in the economy." Investors in the Bank of America survey, though, think rising inflation will force the Fed's hand more quickly than the central bank has indicated. Respondents now see the next interest rate hike coming in November 2022, pulled forward from January 2023. That was driven largely by a nearly doubling in expectations for a move in the first half of next year, to 21% from 11% the previous month. In their latest projections released in March, Fed officials saw no hikes through at least 2023.

Traders working at the New York Stock Exchange (NYSE), today, Wednesday, April 21, 2021.

Source: NYSE

A record 69% of respondents to the monthly reading see above-trend growth and inflation as the most likely scenario ahead.

What's more, inflation is seen by 35% as the biggest "tail risk," or unlikely event that could cause substantial damage.