Global growth optimism fell to its lowest levels on record and sentiment is “dire.”
That’s according to the June vintage of BofA’s Global Fund Manager survey, released on Tuesday.
The net percentage of respondents expecting a stronger economy dropped to -73%. It was the lowest reading since 1994 (figure on the left, below). Although the headwinds to global growth are myriad, market participants are especially concerned that central banks, in their zeal to slay the inflation dragon, will push their respective economies into recession.
Despite near universal conviction that inflation rates are headed lower in the next 12 months, stagflation expectations hit 83% (figure on the right, above).
When it comes to inflation, “lower” is an extremely relative term these days. Although more investors in BofA’s survey believe price pressures will abate than at any time since November of 2008, they nevertheless expect inflation to stay high relative to history. When you combine that with rampant growth pessimism, the result is a stagflation zeitgeist.
Profit expectations were the weakest since September 2008. “Big lows in global profit expectations all occurred at other Wall Street crisis moments,” the bank’s Michael Hartnett said, citing LTCM, the dot-com bust and COVID, alongside Lehman.
Not surprisingly, the biggest tail risk was hawkish central banks, followed by global recession and inflation (figure below).
The top three spots are effectively all the same risk. Hawkish central banks are the most likely recession trigger (although they probably wouldn’t concede that) and central banks are hawkish because inflation is high. Note that cryptocurrencies crept onto the radar.
Expectations for Fed hikes actually receded a bit from May. Survey participants expect 7.6 hikes this cycle, down from 7.9 last month, even as investors overwhelmingly see higher short-term rates over the next 12 months.
“Macro concerns caused investors to stop forecasting further rate hikes by the Fed, so cash levels fell this month to 5.6% from 6.1%,” Hartnett wrote, before noting that “the survey closed the day before the May US CPI data, which shattered hopes of a Fed pause.”