Big Stock Inflow Shows ‘Chase Is On.’ BofA Says Fade It

The “chase is on,” BofA’s Michael Hartnett declared, in the latest installment of the bank’s popular weekly “Flow Show” series.

He was referring to a near $23 billion inflow into global equities over the latest weekly reporting period. It was the largest in 35 weeks.

As the figure (below) shows, the four-week moving average is the strongest it’s been in quite some time. The inflows came as stocks mounted a rousing rally on the heels of a cooler-than-expected CPI report. A few days later, a likewise benign read on producer prices seemingly underscored various “peak inflation” narratives.

Equities have since cooled. US shares came into Friday poised for a modest weekly decline following last week’s ebullient fireworks show.

US equity funds took in almost $24 billion, EPFR’s data showed. That was set against a 40th consecutive weekly outflow from European shares, outflows from Japan and a fourth straight inflow for emerging market equities.

If you ask Hartnett (or really, anyone other than the White House and Fed officials), a recession is coming. He cited the collapse in pending home sales, a 70% decline in lumber prices from the highs, a similarly large drop in global freight rates and negative producer price growth when measured on a three-month/three-month basis.

Of course, the biggest hint is just the 2s10s. This cycle’s inversion printed new extremes this week (figure below).

I suppose there’s elegance in simplicity, and we’re supposed to revere the 2s10s with the respect one might accord a sacred oracle, but at the same time, it’s the most pedestrian indicator on Earth. Charts with big red arrows denoting that depth of the inversion feel chintzy. But, they’re also obligatory. So, I obliged.

Remember, though, it’s not the inversion that gets you, it’s the post-inversion steepening, something Hartnett reiterated. “Inversion is the best leading indicator of recession over the past 50 years, but steepening is the best indicator the recession has begun and a ‘pivot’ imminent,” he said.

The bad news is, “neither is happening until historic low unemployment rates surge.” (Let’s not celebrate until people start losing jobs!)

It’s worth noting that the wave of tech layoffs, as bad as they are for the affected individuals, are of questionable significance for the broader economy. “Information services accounts for a mere 2% of total US employment,” Bloomberg’s Felice Maranz reminded market participants on Thursday. “Tech makes up a big chunk of the S&P 500, but not the real economy, where support services, transportation, leisure and hospitality dominate.”

And that brings us neatly to Hartnett’s bah humbug-esque conclusion. The decline in sundry leading inflation indicators alongside recession anticipation and a step-down in the pace of Fed hikes may continue to spur a “year-end rally chase,” but BofA “says fade S&P >4100.” A hot jobs report for November could end the rally.