The Tell: As stocks sink this year, Bank of America clients want to know what may drive a Fed pivot

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Bank of America’s clients are wondering when they might get some relief from the sharp drop in “risk assets” this year, looking for indicators that may warrant a shift from the Federal Reserve’s hawkish monetary policy stance as it aims to bring down high inflation, according to a BofA Global Research note. 

The selloff in stocks and bonds has raised client questions about when the Fed “might pivot dovish,” BofA strategists said in a rates and currencies report Wednesday. “This is still some time away,” but the focus should be on inflation easing and labor-market weakness seen through a rise in jobless claims and a higher unemployment rate, they said. 

“Bad news = good news when the labor market cracks,” the strategists wrote in the report. “The S&P 500 typically bottoms three months before claims peak.”

While the U.S. labor market is strong, new jobless claims have risen slightly in recent weeks, a “nascent” sign that it may be softening, according to the note. “Initial jobless claims may have already hit a cycle low,” the strategists wrote.

BOFA GLOBAL RESEARCH REPORT DATED MAY 25, 2022

“The S&P 500 typically reaches a cycle low after initial jobless claims bottom,” the strategists said. “On average, we find that the S&P bottoms 21 months after claims trough but three months before claims peak.”

Their research, which is based on the past six fed-funds cycles, also found that 2-year and 10-year Treasury yields typically peak with a strong labor market shortly after initial jobless claims bottom. On average, the two-year yield peaks four months after the trough, while 10-year rates reach their peak eight months after it’s hit. 

BOFA GLOBAL RESEARCH REPORT DATED MAY 25, 2022

An easing of financial conditions and a “big Fed pivot” are unlikely until inflation moderates and clearer signs of a labor-market slowdown emerge, according to the BofA strategists. The Fed is tightening its monetary policy this year, partly by raising its benchmark interest rate.

The U.S. stock market was trading higher Wednesday afternoon, shortly after the release of the minutes of the Fed’s policy meeting in early May. The Dow Jones Industrial Average
DJIA,
+0.44%

was up 0.2%, while the S&P 500
SPX,
+0.82%

rose 0.6% and the Nasdaq Composite
COMP,
+1.43%

gained 1.2%, according to FactSet data, at last check.

Most senior Fed officials “judged” that half-point increases in the central bank’s benchmark rate would “likely be appropriate at the next couple of meetings,” the minutes of the meeting, released at 2 p.m. Eastern Time, show.

As for yields, the 10-year Treasury note
TMUBMUSD10Y,
2.755%

was trading down 1 basis point at 2.75% Wednesday afternoon, according to FactSet data. The 2-year Treasury yield
TMUBMUSD02Y,
2.508%

was about flat at 2.50%.

Should the rise in jobless claims persist, U.S. Treasury yields may be near their peak, while risk assets may not bottom until the labor market “cools further,” said the BofA strategists.

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