Bank of America's Hartnett: Brace for a "June Storm," U.S. CPI Will "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 a record amount of 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 series of intensive macro events and a sharp drain on market liquidity could push global bond yields significantly higher, thereby bursting the current tech asset bubble.

According to Chase Trading Desk, 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 shows that when inflation breaks through a key warning line, it often triggers a deep correction in the benchmark U.S. stock index in the following months.

Meanwhile, the密集 decisions and statements from global central banks are steering market direction. Particularly, the upcoming Federal Open Market Committee (FOMC) meeting, likely to be led by new Fed Chair Warsh, will determine the fate of U.S. stocks and long-end bond yields based on its hawkish or dovish policy stance. Any hawkish signal beyond expectations would severely damage investor sentiment.

Against a backdrop of extremely exuberant bullish sentiment, BofA's internal sentiment indicator has issued a strong "sell signal." Coupled with the unprecedented drain on market liquidity from upcoming mega-cap tech IPOs, current risk assets are in an extremely vulnerable position.

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

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 averaged a 0.6% month-over-month increase, and 0.4% over the past six months. If the May CPI month-over-month growth rate exceeds 0.4% (current market expectation is 0.5%), it would mean the U.S. CPI year-over-year growth rate breaks above 4% and could potentially approach 5% before the U.S. midterm elections. This trend would cause extreme unease 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.

Another inflation indicator that cannot be ignored is the cross-section of the unemployment rate and CPI.

In May, there is a "small probability but significant impact" possibility that the U.S. unemployment rate (consensus estimate 4.3%) could equal or fall below the inflation rate (consensus estimate 4.2%). This would be only the 7th time since 1960. In years when inflation is near or above the unemployment rate (e.g., 1966, 1973, 2008, and 2021), the Fed typically raises interest rates, and Wall Street's memories of these years are often painful.

Additionally, the difference between the unemployment rate and CPI is highly correlated with the U.S. yield curve and is currently pointing towards an inversion in the near term, which is another negatively impacting signal for risk assets.

Global Central Banks in Dense Decision Mode, 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 30-year gilt yield above 6%, the US 30-year yield above 5%, and the Japan 30-year yield above 4%. With the market 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 global central banks, 46 currently have inflation levels exceeding their target or the absolute midpoint of their target range. Against this backdrop, the European Central Bank (ECB) has a 98% probability of hiking rates by 25 basis points, while the Bank of Japan (BoJ) also has an 83% probability of a 25 basis point hike, the latter desperately needing this to prevent the yen from breaching the "Maginot Line" of 160 against the dollar.

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

The market currently faces a policy dilemma: if Warsh is too dovish, long-end yields will head towards 6%; if too hawkish, the S&P 500 faces the risk of correcting back to the 7000 area. A "Goldilocks"-style moderate stance could push the NYSE Composite Index (NYA) towards a new all-time high of 24,000 points.

As Warsh himself said in 2024, global central banks seem complacent about inflation approaching 3%, that the 2% inflation target is no longer taken seriously, and that this compromise is extremely dangerous.

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

On the macroeconomic level, the U.S. is experiencing a K-shaped recovery driven by a "prosperity cycle" of wealth and stocks.

American household stock wealth has increased by $6 trillion year-to-date. This "wealth-price spiral" directly exacerbates inflationary pressures. Despite the economic boom, voter sentiment is inconsistent, with Trump's current inflation approval rating already lower than Biden's lowest point.

In terms of fund 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, cryptocurrencies 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 caused BofA's Bull/Bear Indicator to rise further from 8.5 to 8.7, strengthening the "sell signal" triggered two weeks ago.

Historical data shows that in the 17 'sell signals' since 2002, global stocks averaged a loss of 2% to 3% in 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 Intensify Market Turmoil

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

SpaceX's Initial Public Offering (IPO) will start trading next Friday. Alongside offerings from Anthropic, OpenAI, and related lock-up expirations, this will drain a record amount of liquidity from the market. The magnitude of this liquidity tightening could potentially be more powerful as a market catalyst than the decisions of central banks.

Historical mega-IPOs have had mixed impacts on the market.

While the IPOs of Alibaba and ICBC acted as market catalysts, the listings of Visa and AIA became markers of market "peaks." The S&P 500 and the Hang Seng Index both declined significantly in the 9 to 12 months following these issuances.

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

For investors, this means that global near-term economic policy preferences are undergoing a profound and substantive re-evaluation.