Markets are at risk of an acceleration of growth and inflation that the Fed and economists are 'totally unprepared' for, Bank of America says

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• Inflation and retail sales figures due this week will likely show big headline jumps as the US economy accelerates.
• For investors, there's a risk that the Fed and economists are underestimating the magnitude of economic growth and inflation, said Bank of America.
• BofA reiterated its underweight view of investment-grade credit.
• See more stories on Insider's business page.

The markets are at risk of inflation on the back of a swift economic recovery that's building in the US economy, with Bank of America warning investors ahead of a wave of new economic data this week.

"…In our view, the risk is investors are going to experience an acceleration in economic growth and inflation of a magnitude economists and the Fed are totally unprepared for," said Hans Mikkelsen, head of high-grade credit strategy at Bank of America, in the note. Bank of America reiterated an underweight stance on investment-grade credit.

Investors this week will receive data on consumer prices and retail sales, providing a fresher picture of inflation and how well consumers fared last month against a backdrop of more stimulus money coming from the US government and the ramp-up in vaccinations against coronavirus. Consumer spending accounts for about a third of the country's economic activity.

The US government on a fiscal basis has unleashed $5 trillion in financial aid to help soften the blow from the pandemic. The combination of vaccines and stimulus has stoked expectations for the US economy to continue bouncing back from the virus-fueled recession that left it to contract by 3.5% in 2020.

The consumer price index due Tuesday may show a jump in headline inflation to 2.5% and in core inflation to 1.6% in March, according to an Econoday consensus estimate. Headline inflation in March 2020 was 1.5%. On Thursday, retail sales excluding automobiles in March are expected to increase +4.4% year-over-year, said BofA. However, it said its aggregated credit and debit card data supports its economist's forecast of an "impressive +11.4%" increase.

Consensus expectations for GDP growth started 2021 at a rate of 3.9% and have since risen to 5.8%, "but our economists are now at 7% and it feels like the relevant risk is they too are low," said Mikkelsen.

"While markets are ahead of rates risk implied by consensus, we think they are still far from reflecting reality of what is about to happen. The Fed keeps pushing the view they have ample time to signal monetary policy tightening to markets. But in our view, the reality is markets will not wait for the Fed," BofA added.

The S&P 500 Investment Grade Corporate Bond index has lost about 4% so far this year, driven down alongside a selloff in Treasury bonds as investors have been seeking riskier investments as the US economy improves. As bond fall, an increase in their yields indicates rising borrowing costs.

The Federal Reserve has signaled it will keep its benchmark interest rates near zero until 2024 while investors have been pricing in Fed rate hikes to start by the earliest in late 2022.

"We think the risk of a rates shock will only grow over time and peak in the late Spring/Summer period, as we approach herd immunity and return to normal," said Mikkelsen.

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