Looking through the Fed’s signals
Market take
Weekly video_20240506
Nicholas Fawcett
Opening frame: What’s driving markets? Market take
Camera frame
The past few months of inflation surprises have confirmed that we’re in a fundamentally more volatile environment – creating greater uncertainty for both markets and the Fed.
Title slide: Looking through the Fed’s signals
That’s why we watch incoming economic data, not Fed policy signals, to gauge the policy path.
1: Evolving policy signals
In December, the Fed saw inflation falling toward 2% by the end of 2024, signaling a green light to cut rates this year. Markets priced in seven cuts. Yet goods and services inflation have since been hotter than expected.
The Fed now accepts rates need to stay high for longer given sticky inflation. It also pushed back against hikes. But greater uncertainty just makes it harder for both markets and policymakers to predict what’s ahead.
We see high-for-longer interest rates, a view markets now reflect.
2: Corporate earnings offer support
Markets pricing out rate cuts usually hurts stock valuations. Yet U.S. firms beating Q1 earnings forecasts by 10% has supported stocks.
Tech stocks and artificial intelligence beneficiaries have kept up their robust growth, while other sectors see recoveries as well.
Outro: Here’s our Market take
We see interest rates staying high for longer. We remain overweight U.S. stocks on a six- to 12-month tactical horizon.
We’re tactically neutral long-term bonds because yields could go up or down as markets adjust their policy expectations.
Closing frame: Read details:
www.blackrock.com/weekly-commentary.
We look to incoming data to determine where the Federal Reserve will go, rather than its policy signals. Solid corporate earnings keep us overweight U.S. stocks.
U.S. stocks clawed higher thanks to earnings beating expectations, even as the Fed meeting confirmed we’re in a structurally higher interest rate environment.
We expect the Bank of England to hold rates steady this week. Markets have pared back their expectations of rate cuts this year due to slowly falling inflation.
Q1 inflation surprises have pushed the Fed to flip on its December view and accept that interest rates will have to stay high for longer at last week’s meeting. We’re in a world shaped by structural forces and supply – creating greater uncertainty for the Fed and markets. That’s why we eye new data, not Fed signals, to gauge the policy path. We see high-for-longer rates, a view markets now reflect. We stay overweight U.S. stocks as solid corporate earnings help offset pressure from high rates.
Market backdrop
The S&P 500 rose slightly last week and is up about 8% this year thanks to corporate earnings topping high expectations. U.S. 10-year Treasury yields dropped to around 4.50%, about 25 basis points below their 2024 high hit in late April, after U.S. payrolls undershot expectations and the Fed said its next move was unlikely to be a hike. Yet last week’s Fed meeting also confirmed we’re in a structurally higher interest rate environment.
We expect the BOE to hold rates steady this week. Markets have pared back their expectations of rate cuts this year due to slowly falling inflation. We watch UK GDP data out this week for signs growth momentum is starting to pick up from a period of stagnation. U.S. consumer sentiment data and data on China’s services sector, trade activity and domestic credit lending are also due for release.
Week ahead
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 LSEG Datastream as of May 2, 2024. Notes: The two ends of the bars show the lowest and highest returns at any point 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 U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE U.S. Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (U.S., 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.
China Caixin services PMI
Bank of England (BOE) policy decision; China trade data
University of Michigan consumer sentiment survey; UK GDP data
China total social financing
Read our past weekly market commentaries here.
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