BofA's Hartnett: Brace for the "June Storm"—U.S. CPI to "Burst the Bubble"

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U.S. stocks are facing a severe stress test in June. Bank of America strategist Michael Hartnett warns that a series of intensive macro event risks and a sharp withdrawal of market liquidity may push global bond yields significantly higher, thereby bursting the current technology asset bubble.

According to Chasing Wind Trading Desk, Hartnett said in his latest 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 the risk asset sell-off mechanism. Historical data shows that when inflation surpasses key warning lines, it often induces a deep correction in U.S. benchmark indices in the following months.

Meanwhile, dense decisions and statements from global central banks are dominating market trends. In particular, the upcoming FOMC meeting to be chaired by the new Fed chair Walsh, whose hawkish or dovish stance will determine the fate of U.S. stocks and long-term bond yields; any unexpectedly tight policy signals will hit investors hard.

Amid extremely bullish market sentiment, Bank of America's internal sentiment indicator has issued a strong "sell signal." Coupled with the unprecedented liquidity drain due to the upcoming mega tech IPOs, current risk assets are in an extremely fragile position.

Key inflation data approaches, U.S. stocks face historical pullback risk

The U.S. CPI data to be released on June 10 is the primary test facing the market.

In the past three months, this figure has risen by an average of 0.6% month-on-month, and by 0.4% on average over the past six months. If the May CPI month-on-month growth exceeds 0.4% (market expectation is currently 0.5%), U.S. CPI will rise above 4% year-on-year, and may reach 5% before the U.S. midterm elections. This trend will make risk assets extremely uneasy.

Historical data shows that in the past 100 years, once CPI surpasses 4%, the S&P 500 falls an average of 4% in the subsequent 3 months, and an average of 7% in the following 6 months.

Another inflation metric that can't be ignored is the crossover between unemployment rate and CPI.

In May, there is a "low-probability but high-impact possibility" that the U.S. unemployment rate (consensus: 4.3%) will equal or fall below the inflation rate (consensus: 4.2%), which would be the seventh time since 1960. In years when inflation is close to or above the unemployment rate (such as 1966, 1973, 2008, and 2021), the Fed would usually hike rates, and Wall Street has painful memories of such years.

Furthermore, the difference between unemployment rate and CPI is highly correlated with the U.S. yield curve, currently pointing to recent curve inversion, which is another negative signal for risk assets.

Dense global central bank decisions, bond yields may end prosperity

"All booms and bubbles end with bonds." Michael Hartnett reiterated this logic in the report.

He warns that a series of events in June may push UK 30-year gilt yields above 6%, US above 5%, and Japan above 4%. Since the current market is full of bullish bets and optimistic earnings expectations, a surge in yields is undoubtedly bearish for risk assets.

Global central banks are now clearly behind the inflation curve. Of 68 global central banks, 46 currently have inflation above target or the absolute middle of target ranges. Under this backdrop, there is a 98% probability of the ECB hiking 25bps, and an 83% probability of the Bank of Japan hiking 25bps, the latter urgently needing to avoid the yen breaking the 160 mark against the dollar.

The June 17 FOMC meeting chaired by Walsh is seen as one of this month’s two most important events.

The market currently faces a policy dilemma: if Walsh is too dovish, long-term yields will head toward 6%; if too hawkish, the S&P 500 will risk correcting toward 7000; but a "Goldilocks" moderate stance may push the NYSE Composite Index (NYA) to a record high above 24,000.

As Walsh said in 2024, global central banks appear complacent with near-3% inflation, and the 2% inflation target is no longer taken seriously—a dangerous compromise.

Wealth effect drives inflation, extreme sentiment triggers "sell signal"

On the macro level, the U.S. is experiencing a K-shaped recovery driven by the "wealth and stock market boom cycle."

The stock wealth of U.S. households increased by $6 trillion year-to-date; this "wealth-price spiral" directly exacerbates inflation pressure. Despite the prosperity, voter sentiment is mixed, with Trump’s inflation support rate already lower than Biden’s historically lowest level.

In terms of fund flows, investors have recently shown a pronounced tendency to chase the tech bubble. Last week’s data showed up to $122 billion flowed into cash, $39 billion into bonds (a historic high), $23.1 billion into equities. Meanwhile, $2 billion flowed out of crypto and $3.1 billion out of gold, implying investors are selling other assets to chase tech and semiconductors.

Extreme capital flows have pushed Bank of America’s Bull/Bear indicator from 8.5 to 8.7, making the “sell signal” triggered two weeks ago even stronger.

Historical data shows that in the 17 “sell signals” since 2002, global stocks suffered an average loss of 2-3% in the following two to three months, with maximum drawdowns of 15-20%. Meanwhile, the global breadth indicator shows 48% of global equities are overbought.

Mega IPOs drain liquidity, non-economic events intensify volatility

Besides macro data, June’s biggest non-economic risk event is massive capital supply in the markets.

SpaceX’s IPO will debut next Friday; alongside Anthropic, OpenAI’s offerings, and related lockup expiries, record liquidity will be withdrawn from the market. This scale of liquidity tightening may have catalyst power exceeding that of central bank decisions.

The historical impact of mega IPOs is mixed. While Alibaba and ICBC’s IPOs boosted the market, Visa and AIA’s listings marked market tops, with the S&P 500 and Hang Seng plunging sharply within 9 to 12 months post-IPO.

Politically, a global rightward shift further shapes the macro backdrop. With election results coming in for Peru and Colombia this month, Latin America now has 10 right-leaning governments out of 19—the most since 2003 if Brazil’s October election swings from Lula to Bolsonaro.

Hartnett believes this political shift is the key reason why Latin American bond yields and spreads are at historic lows (217bps, the lowest since Nov 2007); a similar rightward trend is clear in Europe as well. For investors, this means a deep and substantive reevaluation of global economic policy preferences is underway.

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