BlackRock expects hikes this week from the Fed, ECB and BoE, with more to come:
- Obtain inflation down means they need to crush demand, presaging a recession.
- We expect central banks to keep rates high as the recession unfolds, not save the day as in the past.
- Still, Treasury yields have fallen as the market expects Federal Reserve rate cuts, with the yield curve inverting further. We believe this misrepresents hopes for an old recessionary scenario and we remain underweight developed market equities and long bonds.
- We think markets are pricing in rate cuts from mid-2023 (the dark orange line in the chart) because they believe the Federal Reserve will come to the rescue when the recession hits – the old playbook. view has made US yield curves the most inverted since the Fed’s last rapid hike cycle in the 1980s, with five-year Treasury yields falling more than two- and 10-year yields over the course of the last month. This inflated stocks. We expect core inflation to fall further next year from current levels, but we believe central banks will not bring it back to the 2% targets. That would require an even deeper recession, in our view, and we see them coming to a halt before such an outcome as the damage of excessive policy tightening becomes clearer. So we see central banks living with inflation consistently above target – and they won’t be able to cut rates as quickly as markets expect, in our view.
I don’t see the Reserve Bank of New Zealand mentioned in the Black Rock report laying out its views, but marching into recession is exactly what the RBNZ is doing right now.
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