Market is Betting on Policy Pivot but BofA Warns - Fed is 'Nowhere Near Done'

August 19, 2022 7:39 AM EDT
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Bank of America strategist Michael Hartnett reiterated his bearish stance that the Fed is “nowhere near done” when it comes to tightening despite the stronger-than-anticipated rally in equities.

The S&P 500 is down in premarket Friday after the benchmark index briefly returned to trade above the 4300 mark for the first time since early May.

“Very few fear Fed (think “pivot” & return of meme stocks); yet last time Fed ended hiking cycle with negative real rates was 1954 & even assuming CPI gains halve next 6 months inflation 5-6% next spring; whether Fed knows or not, they’re nowhere near done,” Hartnett told clients in a note.

His warnings come after the market saw inflows of $7.9 billion into stocks for the week to Wednesday. Bonds saw moderate inflows while outflows from cash were $500 million.

The risk-on rally is still alive as Treasuries witnessed the biggest outflows since September 2019. On the other hand, inflows to tech were the biggest in the last 5 months.

Hartnett sees two catalysts for the market reversal - oil climbing above $100 and corporate bonds failing key levels.

Net-net, Hartnett believes we are near the top of equity trading range and he is adamant the ultimate lows are still to be seen.

By Senad Karaahmetovic

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Standard & Poor's, BofA/Merrill Lynch, Senad Karaahmetovic