Soaring Inflation Will Not Peak Before January 2022: Here's How To Trade It

Soaring Inflation Will Not Peak Before January 2022: Here's How To Trade It


FRIDAY, MAY 07, 2021 - 01:33 PM

In his latest weekly Flow Show note, BofA's CIO Michael Hartnett looked at the historical record and correctly predicted that today's job print would be a "highly risk-on event" as the past 12 reports, 10 have seen the S&P jump on average 1% on day of release.

Perhaps more importantly, Hartnett predicts that going forward, wages will be more important than payrolls in the coming months and that Average Hourly Earnings monthly prints of more than 0.3% MoM will likely provoke fresh upgrades to 2022 inflation forecast.

Which would be troubling: according to rates markets, using the 5-year forward breakeven curve, we find that 5-year inflation is expected to peak at 2.7% in Jan’22 (up from 2.0% just 6 months ago), and this number is likely to only go up.

So how should one trade this surge in inflation over the next 8 months? According to Hartnett, there are two ways:

  • The Secular, or 1-2 year view: higher inflation = higher yields = real > financial assets, commodities > bonds, RoW stocks > US, small>large cap, value>growth.
  • Tactical, or 1-2 quarter view: peak Positioning, Policy, Profits (“3Ps”) + rising Rates, Regulation, Redistribution (“3Rs”) low/negative stock/credit returns next 3-6 months…optimal barbell = long inflation & long quality.

Focusing on the "peak liquidity" aspect first, Hartnett points to the recent crash in new economy stocks relative to old economy (e.g. AARK vs BRK) which he says "is reminiscent of the 2000/01 post-bubble price action."

On the other end of the tech spectrum, FAAMG stock upside has been impeded by positioning & valuation (market cap of FAAMG = 3rd largest country by GDP)