Risky assets like stocks are on fire as investors pile into the market amid tumbling inflation, Bank of America says

• Stocks and other risk assets are “on fire,” Bank of America strategists said on Friday. 
• Investors poured $12 billion into stocks in the last week as the disinflation narrative deepened. 
• Markets are expecting the Fed to soon pull back on rate hikes, which would be a positive for equities.

Risky assets like stocks are heating up, with investors pouring cash into the market in recent days as inflation appears to be in full retreat, according to Bank of America.

The S&P 500 perked up 2% the last week, rallying over 100 points. Meanwhile, investors pumped $11.6 billion into the stock market over the last week, Bank of America strategists said, a sign traders are growing more bullish on risk assets as inflation keeps cooling. 

Inflation rose 3% year-over-year last month, per the June Consumer Price Index report. That’s well below the 41-year-record of 9% for headline inflation notched last summer. Cooling CPI as well as a lower Producer Price Index reading on Thursday have led markets to declare “mission accomplished” in the Federal Reserve’s inflation fight, the BofA strategists said.

“Headline 2% to 9% to 3% roundtrip is now complete,” strategists said in a note on Thursday. “Risk assets en fuego as Goldilocks [inflation report] schools us bears.”

Cooler inflation spells good news for equities, and has raised the odds that the US economy can avoid a bad recession. A so-called soft landing would be an impressive feat for the Fed, as it successfully threads the needle to bring down inflation without crushing economic growth and sparking high unemployment. 

Still, some experts have warned inflationary pressures are still a threat, with core inflation accelerating 4.8% year-per-year over the last month. Core inflation pressures still need to be addressed, San Francisco Fed President Mary Daly said this week, suggesting before the June CPI was published that a “couple more” rate hikes may be needed. 

Markets, though, are anticipating just one more rate increase before the Fed hits pause. Investors have priced in a 96% chance of a 25 basis-point hike in July, and an 81% chance the Fed keeps rates steady at that level in September, per the CME FedWatch tool.

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