Record 90% Of Fund Managers Say Inflation Has Peaked

Global growth expectations might’ve bottomed this month among fund managers.

That’s according to the December installment of BofA’s Global Fund Manager survey, which showed that although macro sentiment remains very bearish, there are “tentative signs” of a trough.

The net percentage of respondents expecting a weaker economy is loitering near record lows, but loitering is better than falling I suppose. The series maps reasonably well with YoY returns on the S&P (figure on the left, below).

At the same time, subjective recession odds are in the process of peaking, with 68% of survey participants calling a recession likely in the next 12 months, down from 77% in November (figure on the right, above).

As BofA’s Michael Hartnett noted, “The easing in recession expectations were likely driven by an improved outlook on China’s growth.”

The notion that inflation has peaked is now nearly universal among fund managers. A net 90% think inflation will be lower in 12 months (figure below). Naturally, that’s feeding into expectations for short rates.

Still, “inflation stays high” took the top spot on the tail risk list, commanding 37% of the vote, up from last month. “Deep global recession” occupied the second spot, followed by hawkish central banks, geopolitics and credit events. Investors overwhelming chose “US shadow banking” as the most likely source of a systemic credit event.

Since usurping COVID early last year, “inflation” or “hawkish central banks” has occupied the top spot on the tail risk list every month but two (Russia’s invasion of Ukraine held the spot for a month, and investors feared a global recession the following month).

Respondents expect Fed funds to peak around 5% in the second quarter. Expectations for lower rates were the highest since March of 2020, at the onset of the pandemic. As a reminder: Stocks typically don’t bottom until investors expect Fed cuts.

319 panelists with more than $815 billion in AUM participated in the December survey.