He explained that the relief rally in the stock market at the moment is due to “a temporary sugar high” from companies working to fulfil the “unusually large” backlog of orders from the pandemic, which is running out at a faster rate than the rate of receiving new orders.

“New orders are really like the fuel of the economy. The flow of the fuel is running out, but you still have a full tank, you’re running down these orders now,” he said on the call. “That basically means the market has not reacted yet. That’s why the markets are overshooting relative to the weak [purchasing managers indexes].”

Raedler anticipates “two waves of pain” washing over the economy. The first comes from inventory rollover and high energy prices in Europe and the second from monetary tightening, which he says hasn’t fully played out in the economy yet. However it is already causing a weak credit cycle in the European and U.S. markets, seen in the housing market.

“Our best estimate is that now the next step is for this tightening to come through weakening growth. We have basically expected a trough in the macro cycle in the middle of the year,” Raedler says.

This is down to the euro area, the U.S. and China making up 90% of the global cycle, and with what Raedler calls a “borderline reckless” reopening strategy in China, which has led to high Covid infection rates.

“Economists view in short, that China’s going to be a drag on the global cycle in the first half of the year, it only becomes a tailwind in the second half. We very much agree,” he said. “It could happen earlier but that’s basically the base case scenario, in which case, basically up to the middle of the year, you’re getting basically weakening growth cycle in the Euro area and U.S. because of these credit dynamics playing out”.

Raedler said a European Central Bank survey of credit conditions is suggesting a big deterioration in the economy and in purchasing managers indexes in particular.

He anticipated a rebound later in the year will kick in, causing PMI to accelerate as all the “last incremental negative slowdown catalysts” play out.

“You’ll start to get wearing off of these drags from various dynamics in China, and the credit dynamic in the Euro and the U.S.,” he added.

For the markets, Raedler says the sectors where BofA are underweight – such as banks, autos, energy, capital goods and airlines – it expects earnings downgrades to continue.

“The moment we think the macro cycle has troughed, if coupled with the markets finally pricing this in, then there’s a lot of upside, and we would turn positive or good, but I remember very well capital goods was a key overweight in March 2020 and will be again if the macro roughly plays out as we expect.”