We’re not there yet.
It’s a familiar refrain when it comes to the “Big Low” discussion. In the simplest possible terms: Equities will only trough when most investors believe rate cuts from the Fed are likely.
Unfortunately in that regard, only a third of participants in the November vintage of BofA’s closely watched Global Fund Manager survey currently predict lower short rates. Historically, that percentage is closer to two thirds around prior “Big Lows.”
Asked what’s most likely to prompt a Fed pivot, panelists said PCE below 4%. We’ve got “a ways to go” on that front, as sundry policymakers are now fond of putting it. Indeed, the overshoot alone is still around four percentage points (figure below).
Suffice to say “average inflation-targeting” was a resounding success, to employ the obvious (and tired) joke.
Based on October CPI and, as of Tuesday, PPI, I suppose you can reasonably expect the next PCE prints to be benign, at least relative to consensus. For what it’s worth (which is not nothin’, by the way), the Cleveland Fed’s inflation nowcast suggests PCE and core PCE will print 6% and 5%, respectively, for October when the data is released later this month.
Getting back to 4% PCE is, I suppose, possible in the first half of 2023. Again, that’s the level fund managers believe is consistent with a pivot of some kind. The same respondents to BofA’s poll expect peak Fed funds around 5% in Q2. Terminal rate pricing was around 4.90% on Tuesday following the soft PPI data, and markets still price rate cuts for the back half of 2023.
The figure (above) shows the disparity between expectations for lower inflation and those for lower short rates. Apparently, the “higher for longer” narrative is resonating at least a little bit.
Until short rate expectations suggest a majority believe rates will be lower in the year ahead, we’re “not there yet” vis-à-vis the bear market low for equities.
Speaking of equities, FMS participants’ Underweight in stocks was two standard deviations this month, the same as their Overweight in cash. Sentiment, BofA’s Michael Hartnett remarked, is “still uber-bearish.”
