2 big market risks for 2022, according to Bank of America

Markets should be wary of high inflation and the potential spread of new COVID variants in 2022, a new Bank of America (BAC) report warns.

“Future COVID waves are the biggest downside risk,” the report noted. “On the upside, the supply-side wakes up to meet the gains in demand.”

Authored by several Bank of America Global Research economists, the report mainly focuses on the various threats to the global economy in 2022 and beyond.

Among these economic risks are high inflation rates, the spread of variants like the recent Omicron strain, climate change, and supply constraints.

The emergence of the Omicron variant in November left its mark on markets at the end of last month, with the Dow Jones falling over 1500 points the week following Thanksgiving.

Earlier this month, World Health Organization chief scientist Soumya Swaminathan spoke at the Reuters NEXT Conference where she emphasized the variant’s high transmissibility and noted that it could one day become the dominant COVID strain around the world.

The report found that the unprecedented fiscal stimulus enacted by the federal government to counter COVID-related economic issues should ensure that “the U.S. will resume its role as an engine of global growth, while China will be a reluctant laggard.”

China-US relations were a cause for concern for the global economy as well, the authors wrote in the report. “There is also considerable uncertainty about how relations between China and the West will develop. A rapid unravelling of economic interlinkages could trigger a global recession.”

Even if the new COVID variants which emerge in the next year are controlled to the utmost extent, inflation concerns still might make for a murky future for US economic growth.

Trader John Romolo works on the floor of the New York Stock Exchange, Thursday, Dec. 2, 2021. Stocks are opening mostly higher on Wall Street Thursday as investors continue to monitor the spread of the new coronavirus variant as well as measures that the U.S. and other governments are taking to restrain it. (AP Photo/Richard Drew)

A ranking from the report of 10 different currencies from around the world found that the U.S. had the highest inflation score, at 46. It was followed by the New Zealand dollar, at 38, and the Great Britain Pound, at 37.

“It’s been a bit nerve wracking to watch the recent very strong inflation readings,” the report noted. “In the summer, most of the increase was driven by spikes in specific sectors, but in the last few months the pressure has moved into the middle of the inflation distribution … Relative to a year ago, we have raised our global CPI inflation forecast for this year from 2.4% to 3.9% and for next year from 2.8% to 3.8%.”

Overall, inflation should cool, even in the U.S. The CPI was 6.2% in October, continuing the rampant inflation not seen domestically in decades. Although this rate of inflation may subside slightly, Bank of America Global Research cautioned that inflation may still be a significant issue for the economy in the short run. BofA’s Chief US Economist Michelle Meyer and VP Alexander Lin wrote that three rate hikes in 2022 were very possible, looking forward.

“Inflation will cool from the current highs but remain well above target, leaving the Fed to move into action,” the report predicted. “While 2021 was a story of excess demand and a dearth of supply, we think 2022 will be one of rebalancing, albeit only gradually. This should take some of the heat off of inflation but not quickly enough, leaving the Fed to hike three times starting in June and continuing on a quarterly cadence.”

Ihsaan Fanusie is a writer at Yahoo Finance. Follow him on Twitter @IFanusie.

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