72% say inflation is transitory: BofA survey

72% say inflation is transitory, according to a BofA Global Fund Manager survey. BofA Global Research Global Investment Strategist David Jones joins Yahoo Finance Live to discuss.

Video transcript

AKIKO FUJITA: Well new data out on producer prices this morning, just the latest economic report pointing to growing inflationary pressures. But a new BofA survey says fund managers overwhelmingly see inflation as transitory right now. Let's bring in David Jones, BofA Global Research Global Investment strategist. And David this is, of course, the big question before the Fed in its two-day meeting today. What you find in the survey here in terms of how fund managers view the latest economic data?

DAVID JONES: So this month's fund managers survey was interesting in that we continue to see a very bullish outlook from investors but we do see that they're coming down off of peak levels of optimism that we saw in March and April. So for instance, if you take a look at their expectations for the next 12 months in terms of economic growth, in terms of earnings, in terms of margins, all those are still at very high levels, but they're coming down a bit. And this speaks to the theme that we have been bringing up about what we call the three P's, so that's peak profit, peak positioning, and peak policy. And we think that's going to be the fact that it's driving the market going forward.

ZACK GUZMAN: Yeah, it was interesting 64% seeing higher inflation in the next 12 months that was down 19% month over month. And you wonder what that means for the way that these fund managers are looking to build portfolios and interesting to see banks still up there. That's one. You had Fundstrat's Tom Lee talking about rotating away from financials if you're not necessarily going to see those interest rates hikes sooner rather than later. I wonder what you made of the mix relative to past surveys here when you look at the mix of what people are building portfolios out to look like now?

DAVID JONES: It is interesting. So we see a lot of interest in commodities which, again, is sort of an inflation play as well as a growth play. Even though we see that 72% of investors say that inflation will be transitory, we also see that they were adding to their positions in industrials and materials. And of course, banks was still their number one position as far as sectors go. So you do see a weighting towards late cyclicals, which we think is probably not a bad idea. But our recommendation would be to barbell that position with some quality defensive. We would recommend taking a look at global staples and utilities.

AKIKO FUJITA: Having said that, David, how big of a market mover do you anticipate tomorrow's decision to be? Largely, we're not expecting a policy change per se, but you've had a number of people come forward and say this is probably one of the more consequential meetings, especially given how the Fed needs to toe this very fine line in signaling some tapering but not necessarily scaring investors to say it's going to happen right away.

DAVID JONES: Yeah. I think that if, at the end of the day, after the Fed has given its statement and the press conference, if prices are unchanged in equities and if bond yields are unchanged, they're going to be high-fiving each other on Constitution Avenue. That's exactly what they want. They don't want this meeting to be a market changer. They want to be a very consistent message.

The framework that they're using is the 2013 taper tantrum. That is what they're trying to avoid. So they're talking about talking about tapering. They're going to beat that relentlessly into the ground. And so that by the time they actually begin to talk about tapering, nobody is going to be surprised. It will all be priced in, and the price action should be minimal.

ZACK GUZMAN: Yeah. The other interesting thing that stood out to me in the survey here, David, was Bitcoin and the idea of many of your respondents here also saying that we're still in a bubble when it comes to Bitcoin. 81% of those surveyed saying that. What does that signal to you, maybe, as potential counter to that thesis if that many people are worried about a bubble right now?

DAVID JONES: Well we do not make markets in Bitcoin, and we make no investment recommendations on Bitcoin or other cyber currencies or cryptocurrencies. But what we can say is that, look, commodities became the number one risk in terms of in the response of the survey. Bitcoin is actually the second. And part of that was due to when the survey was taken. It was taken after there was quite a selloff in Bitcoin at the end of May.

But one of the things you can certainly say about Bitcoin is that it is volatile. Yes, if you look at it at certain points along the time of year you have these tremendous returns. But when you take a look at that on a risk adjusted basis, it really doesn't look that much better compared to other sorts of asset classes.

ZACK GUZMAN: And one more thing here too. We were just talking about tapering at the start the show when it comes to what we're expecting to hear from the Fed tomorrow. I noticed you're thinking about Jackson Hole. In this survey, that seems to be where people are. How does that maybe compare to earlier surveys and what you've seen in the shifting timeline as people have bought into the idea that a lot of the inflation talk right now might be indeed transitory?

DAVID JONES: Well, what we really have seen is that expectations for the Fed have shifted forward. There was a time a few surveys ago that people weren't talking about the Fed even tapering until perhaps 2022. But now that has certainly moved forward.

We also see expectations for short rates moving forward as well, so that has been steadily rising and that has, in effect, has also brought down expectations for the steepness of the yield curve. So inflation is definitely on people's minds. The question is how sticky it's going to be.

AKIKO FUJITA: Interesting insight there with that survey. David Jones with BofA Global Research. He's the global investment strategist there.