After 'Inflation Shock' in 2021 Prepare for 2022 'Rates Shock' - BofA

October 22, 2021 6:51 AM EDT
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In a regular weekly update “Flow Show,” BofA’s Chief Investment Strategist Michael Hartnett shared the latest “flows to know” for a week ending Wednesday.

In total $24.5 billion went into stocks, the largest inflow in the last 5 weeks. Elsewhere, $5,7 billion went into bonds, while gold and cash both recorded outflows of $0.2 billion and $4.2 billion, respectively.

More importantly, it seems that investors have started to prepare for the “2022 rates shock” with the largest inflow to bank loans in 6 months ($1.1 billion).

“2020 "growth shock"...policy panic...V-shape on Wall St...V-shape on Main St –...stocks the winner; 2021 "inflation shock"...demand for goods, services, labor, housing up big, supply not so much...commodities & crypto the winner; 2022 "rates shock"...Fed hikes as anti-inflation monetary policy tightening spreads from EM to DM ...vol & US dollar = winners, credit, stocks, tech = losers,” commented Hartnett.

“Most likely catalyst for hawkish Fed et al in 2022 = surge in wage growth predicted by huge imbalance between labor supply & labor demand; vaccinations not inducing higher labor participation; bargaining power of labor rising sharply (especially as easy Wall St gains one factor reducing incentive to return to labor force); fascinating high quits rate (traditionally seen as strong labor market) coinciding with weak consumer confidence.”

Last week also yielded the largest outflows in EM stocks since August 2020 when the last 4 weeks are seen combined.

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