Investors ignoring inflation risk with rate hopes, says BofA

Investors expecting Federal Reserve rate cuts as soon as March may be underestimating the risks posed by inflation, say Bank of America Corp. strategists.

The US central bank rarely cuts rates when consumer prices are higher than the unemployment rate, as they are currently, the team led by Michael Hartnett wrote in a note, citing five such instances in the past 90 years. Hartnett noted that such reductions were triggered by war or recession. 

In a sign that investors are already tempering their optimism, stock funds saw outflows of $7.1 billion in the week through Jan. 10, according to the BofA note, citing EPFR Global. Equities have been mixed this month after a strong fourth quarter rally as traders assess the path of monetary policy.

Thursday’s inflation print showed prices accelerated at the end of 2023 while last week’s figures illustrated that job growth picked up in December. That’s stoked a debate about the path of rate cuts, but not enough to fuel a large-scale selloff.

Adding to concerns, shipping attacks in the Red Sea are inflationary, Hartnett wrote, citing transit volumes that are down by as much as 45% in the past four weeks. The Middle East conflict has escalated with the US and UK launching airstrikes on Houthi rebel targets in Yemen, sparking vows of retaliation and rising oil prices.

Hartnett — who was negative on stocks last year even as they rallied — said he likes bonds and has previously predicted they will make a comeback in 2024. Bond funds had $13.9 billion of inflows in the week through Wednesday, while investors continued to pour into money-market funds at $39.7 billion.