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Central bank blitz to hit growth

Market take

Weekly video_20220621

Alex Brazier

Opening frame: What’s driving markets? Market take

Camera frame

A stampede of central banks raised interest rates last week and this sent shockwaves through the market.

Title slide: Central bank blitz fuels growth risk

A flurry of central bank moves revealed many are ignoring the crushing effects that sharply higher rates could have on economies. 

And this raises serious growth risks, and we now see the restart of the US economy stalling in the coming quarters.

1: Risk of Fed overtightening policy

The Fed seems determined to raise rates sharply this year. It’s responding to the politics of current high inflation: a chorus of voices calling for it to do something to get inflation down.

2: Risks to US growth 

We now see serious risks to US growth early next year amid mounting challenges: the energy shock, growth slowdowns elsewhere and higher rates tightening financial conditions.

The Fed is raising rates so fast that there isn’t enough time for data to react to events. It will realize too late that it’s stalling the restart.

3: The politics of inflation  

The politics of inflation will give way to harsh economic reality. And the Fed could reverse course next year. 

It will be too late to rescue growth. But it will be enough to mean supply-driven inflation persists for quite some time.   

Outro frame: Here’s our Market take  

Here’s our market take…

A central bank blitz to raise rates poses serious risks of stalling the restart.   

So, we don’t think this is the time to buy the dip. 

Closing frame: Learn more:

A serious growth risk

We see the Fed on a path to raise rates far enough this year to hurt growth. The US activity restart from the pandemic could grind to a halt in coming quarters.

Market backdrop

The Fed lifted rates by 0.75% in a rush to normalize policy, its biggest hike since 1994. Other central banks joined, sending shockwaves through markets.

Week ahead

This week’s US and European PMI updates will give an early read on June growth momentum and help gauge the easing of supply chain disruptions.

A flurry of central bank moves last week has revealed many are ignoring the crushing effect this will have on growth. This dynamic raises serious growth risks, and we now see the US restart of economic activity stalling over the coming quarters. The focus is on the Fed – and we think it will ultimately change course but not before causing growth to stall. This raises the specter of growth weakness but still persistent inflation. We don’t see this as an environment for buying the dip.

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Chart of the week

Fed projections

Fed funds and GDP growth projections by meeting

The charts show changes in the Fed’s median projection for the Fed funds rate and GDP growth from September 2021 to June 2022. The red line in the left chart shows the Fed is ready to push rates to nearly 4% by next year. Yet the red line in the right chart shows that the Fed continues to forecast t

Sources: BlackRock Investment Institute and Federal Reserve, June 2022. Notes: The charts show the progression of the Fed’s median projection for the Fed funds rate and GDP growth in its quarterly Summary of Economic Projections.

The Fed’s updated “dot plot” of the Fed funds projection shows it’s ready to push rates to nearly 4% by next year (red line, left chart). This takes rates well beyond neutral of around 2.5% –  the level that neither stimulates nor decreases economic activity. Yet the Fed continues to forecast trend-like growth (red line, right chart). Financial conditions are already quickly tightening. And with growth slowing elsewhere and higher energy prices, we expect a worsening macro environment for the rest of the year and into 2023. The Fed isn't looking for a recession, even though in our view one would be needed if it wanted to drive inflation back down to 2%. So we expect the Fed to change course once it becomes clear growth has stalled.

A policy trade-off

The Fed seems dead set on raising rates this year to levels that, in our view, would clearly slow the economy. It seems to be responding to the “politics” of current high inflation. But the Fed isn’t actually looking to slow the economy. Fed Chair Jerome Powell said the central bank is not trying to induce a recession. This reflects the Fed’s lack of acknowledgment of the policy trade-off. Current high core inflation rates reflect an imbalance of demand and supply broadly across the economy. It isn’t due to overheating demand but unusually low production capacity in an incomplete restart following the pandemic.

In fact, the Fed is facing an acute trade-off: either slam down activity or live with persistent inflation while production capacity recovers. The Fed hasn’t acknowledged this. It assumes that a rapid return of supply capacity will help resolve high inflation – so any upside surprise to inflation will push it toward tighter policy, and a downside surprise on inflation won’t necessarily slow it down. If the Fed jacks up rates and then changes course as we expect, it still raises the risk of zero or negative growth and persistent inflation. When the macro environment is shaped by production constraints, the Fed can’t avoid volatility. It can only trade inflation volatility for output volatility – a big theme at our 2022 Midyear Forum last week. We may be set for both, posing a further drag to risk assets.

Risks ahead for other central banks

How does the inflation/growth trade-off play out elsewhere? We think the European Central Bank (ECB) will be forced to confront reality sooner because the euro area will feel economic pain sooner. The ECB’s planned policy normalization underappreciates the risk of the energy crisis pushing the euro area into recession. The ECB’s troubles are seen in the peripheral bond volatility that sparked an emergency meeting last week to help steady financial conditions across the euro area. That comes as the Swiss central bank and the Bank of England (BOE) also raised rates last week, with the BOE warning of recession risks. The BOE is closer to acknowledging the policy trade-off and could decide to go slow on further rate hikes. The Bank of Japan bucked the trend, keeping its ultra-accommodative stance, largely because inflation remains low and Japan did not have harsh lockdowns driving the inflation volatility in other major economies.

What this all means for investments

We already reduced portfolio risk twice this year on growing concerns over the effect of the energy crunch on growth and central banks overtightening. This is why we don’t see the risk asset retreat as a reason to buy the dip – and expect more volatility ahead.

Market backdrop

The S&P 500 slid into bear market territory after the Fed lifted rates by the most in three decades. The Fed said it could push rates to 3.4% this year – a level that would hurt activity and could bring the restart to a halt, in our view. Other hawkish central bank moves followed. The Swiss National Bank unexpectedly hiked rates for the first time in 15 years. We think central banks’ failure to acknowledge policy trade-offs amid the politics of high inflation raises serious growth risks.

Services and manufacturing data in the US and Europe will give an early read on growth momentum in June and help gauge the ongoing easing of supply chain disruptions. We think the risks to growth are escalating as many central banks steadfastly hike rates without fully acknowledging the high costs. UK inflation is likely to remain high in data out this week, fueling calls for a continued hawkish response from the Bank of England.


Week ahead

The chart shows that Brent crude oil is the best performing asset this year to date among a selected group of assets, while U.S. equities are the worst.

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Refinitiv Datastream as of June 17, 2022. Notes: The two ends of the bars show the lowest and highest returns at any point this year-to-date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in US dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE US Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, Refinitiv Datastream 10-year benchmark government bond index (US, Germany and Italy), Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index and MSCI USA Index.

June 22

Euro area consumer confidence; UK CPI

June 23

US, euro area, UK and Japan flash PMI data; Japan CPI

June 24

UK retail sales; Germany Ifo survey; Brazil CPI

Read our past weekly commentaries here.

Investment themes


Living with inflation

Central banks are facing a growth-inflation trade-off. Hiking interest rates too much risks triggering a recession, while not tightening enough risks causing runaway inflation. The Fed has made it clear it is ready to dampen growth. Implication: We are neutral developed market (DM) equities after having further trimmed risk.


Cutting through confusion

The Russia-Ukraine conflict has aggravated inflation pressures. Trying to contain inflation will be costly to growth and jobs. We see a worsening macro outlook due to the Fed’s hawkish pivot, the commodities price shock and China’s growth slowdown. Implication: We stay underweight US Treasuries and overweight inflation-linked bonds.


Navigating net zero

Climate risk is investment risk, and the narrowing window for governments to reach net-zero goals means that investors need to start adapting their portfolios today. The net-zero journey is not just a 2050 story; it's a now story. Implication: We favor equity sectors better positioned for the green transition.

Directional views

Strategic (long-term) and tactical (6-12 month) views on broad asset classes, June 2022

Legend Granular

Note: Views are from a US dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.

Our granular views indicate how we think individual assets will perform against broad asset classes. We indicate different levels of conviction.

Tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, June 2022

Legend Granular

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: views are from a US dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.

Jean Boivin
Head – BlackRock Investment Institute
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Alex Brazier
Deputy Head – BlackRock Investment Institute
Vivek Paul
Senior Portfolio Strategist – BlackRock Investment Institute

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