Bank of America's Hartnett: Brace for a "June Storm," U.S. CPI Set to "Prick the Bubble"

Original author: Ye Zhen, Wall Street News

Bank of America strategist Hartnett issued a warning: if upcoming inflation data exceeds expectations, it will directly trigger a sell-off in risk assets. Historical data shows that over the past 100 years, once CPI breaks above 4%, the S&P 500 has averaged a decline of 4% over the following 3 months and 7% over the following 6 months.

Furthermore, the market's "sell signal" continues to strengthen. Mega IPOs like SpaceX will drain record liquidity. Combined with the risk of a hawkish pivot by global central banks, the tech bubble is facing an extremely fragile moment.

The U.S. stock market is facing a severe stress test in June. Bank of America strategist Michael Hartnett warns that a raft of dense macro event risks and a sharp withdrawal of market liquidity could push global bond yields significantly higher, thereby bursting the current tech asset bubble.

According to tracking desks, Hartnett stated in his latest research report that the upcoming U.S. CPI data is the core catalyst for this "June Storm." If the latest inflation data exceeds expectations, it will directly trigger a sell-off mechanism for risk assets. Historical data indicates that when inflation breaks through key warning levels, it often leads to a deep correction in the benchmark U.S. stock index over the following months.

At the same time, the密集 decisions and statements of global central banks are steering market direction. Particularly, the upcoming Federal Open Market Committee (FOMC) meeting, which will be led by new Fed Chair Warsh. The hawkish or dovish leaning of its policy stance will determine the fate of U.S. stocks and long-term bond yields. Any unexpected tightening signal would deal a heavy blow to investors.

Against a backdrop of extreme bullish euphoria in the market, Bank of America's internal sentiment indicator has already issued a strong "sell signal." Coupled with the unprecedented liquidity drain from upcoming mega tech IPOs, current risk assets are in an extremely vulnerable position.

Key Inflation Data Approaches, U.S. Stocks Face Historic Risk of Decline

The first major test for the market is the U.S. CPI data to be released on June 10th.

Over the past three months, this data has risen by an average of 0.6% month-over-month, and over the past six months, it has averaged 0.4%. If the month-over-month CPI growth for May exceeds 0.4% (currently market expectations are 0.5%), it means the year-over-year U.S. CPI growth rate will break above 4% and could head towards 5% before the U.S. midterm elections. This trend would greatly unsettle risk assets.

Historical data shows that over the past 100 years, once CPI has broken above 4%, the S&P 500 has averaged a decline of 4% over the following 3 months and 7% over the following 6 months.

Another inflation indicator that cannot be ignored is the intersection of the unemployment rate and CPI.

In May, there exists a "very low probability but high impact" possibility: the U.S. unemployment rate (consensus expectation 4.3%) could equal or drop below the inflation rate (consensus expectation 4.2%). This would be the 7th occurrence since 1960. In years when inflation is close to or higher than the unemployment rate (e.g., 1966, 1973, 2008, and 2021), the Fed typically raises interest rates, and Wall Street's memories of those years are often painful.

Additionally, the difference between the unemployment rate and CPI is highly correlated with the U.S. yield curve, currently pointing towards a near-term curve inversion, another negative signal for risk assets.

Dense Global Central Bank Decisions, Bond Yields May End the Boom

"Booms and bubbles are ultimately ended by bonds," Michael Hartnett reiterated this logic in the report.

He warned that a series of events in June could push the UK's 30-year government bond yield above 6%, the US above 5%, and Japan above 4%. Given that the market is currently laden with bullish positions and optimistic earnings expectations, a surge in yields is undoubtedly bearish for risk assets.

Global central banks are clearly lagging behind the inflation curve. Of the 68 central banks worldwide, 46 currently have inflation exceeding the absolute midpoint of their targets or target ranges. Against this backdrop, there is a 98% probability the European Central Bank (ECB) will raise rates by 25 basis points, while the probability of the Bank of Japan (BoJ) raising rates by 25 basis points is also 83%, as it urgently needs to prevent the yen from breaking through the "Maginot Line" of 1 USD to 160 JPY.

The June 17th FOMC meeting, led by Warsh, is considered one of the two most important events of the month.

The market currently faces a policy dilemma: if Warsh is too dovish, long-term yields will head towards 6%; if too hawkish, the S&P 500 faces the risk of correcting back to the 7000 level; a 'Goldilocks' style moderate stance could push the New York Stock Exchange Composite Index (NYA) to break through its all-time high of 24,000 points.

As Warsh stated in 2024, global central banks seem complacent about inflation nearing 3%. The 2% inflation target is no longer taken seriously, and this compromise is extremely dangerous.

Wealth Effect Fuels Inflation, Extreme Sentiment Triggers 'Sell Signal'

From a macroeconomic perspective, the U.S. is experiencing a K-shaped recovery driven by a "virtuous cycle" of wealth and stock market gains.

U.S. household stock wealth has increased by $6 trillion year-to-date. This "wealth-price spiral" directly exacerbates inflationary pressures. Despite the economic boom, voters' perceptions are mixed, and Trump's approval rating on inflation has already fallen below Biden's lowest point.

In terms of capital flows, investors have recently shown an extreme tendency to chase the tech bubble. Last week's data showed a massive $122 billion flowing into cash, $39 billion into bonds (a record high), and $23.1 billion into stocks. Meanwhile, cryptocurrency saw $2 billion in outflows, and gold saw $3.1 billion in outflows, indicating investors are selling other assets to chase the tech and semiconductor sectors.

Extreme fund flows have pushed Bank of America's Bull/Bear indicator from 8.5 further up to 8.7, intensifying the "sell signal" triggered two weeks ago.

Historical data shows that among the 17 "sell signals" since 2002, global stock markets have averaged a loss of 2% to 3% over the subsequent 2 to 3 months, with maximum drawdowns reaching 15% to 20%. Furthermore, global breadth indicators show that 48% of global stock markets are in overbought territory.

Mega IPOs Drain Liquidity, Non-Economic Events Heighten Market Turmoil

Beyond macroeconomic data, the biggest non-economic event risk in June comes from the massive supply in the capital markets.

The Initial Public Offering (IPO) of SpaceX will start trading next Friday. Together with the offerings from Anthropic and OpenAI, and the expiration of related lock-up periods, this will drain a record amount of liquidity from the market. The tightening of liquidity at this scale could be as powerful as a market catalyst, possibly even surpassing the decisions of central banks.

Historical impacts of mega IPOs on the market are mixed.

While the IPOs of Alibaba and ICBC acted as market stimulants, the listings of Visa and AIA marked market "peaks." The S&P 500 and the Hang Seng Index both saw significant declines in the 9 to 12 months following these IPOs.

Hartnett believes this political shift is the core reason Latin American bond yields and spreads are currently at historic lows (falling to the lowest level since November 2007, at 217 basis points). Similar political rightward trends are also evident in Europe.

For investors, this implies a profound and substantive reassessment of global economic policy preferences is underway.