Market take
Weekly video_20240916
Jean Boivin
Opening frame: What’s driving markets? Market take
Camera frame
The Federal Reserve is set to cut interest rates for the first time since the pandemic.
Yet it and other central banks are not heading for an easy policy stance.
Title slide: Starting the tight policy unwind
1: Why we don’t see recession ahead
An uptick in the unemployment rate has helped stoke recession fears. We see these fears as overdone.
Employment is still growing robustly. The unemployment rate is not rising due to layoffs, but because elevated immigration has expanded the workforce.
2: Recession pricing overdone
Markets are pricing Fed rate cuts as deep as those in past recessions. We think this is similarly overdone.
Once immigration normalizes, the economy will not be able to add jobs as quickly as it has been without stoking inflation.
This will keep the Fed from cutting as deep as in past cycles, we think.
3: ECB policy
The European Central Bank cut rates again last week.
We see euro area inflation falling to 2% and staying near there – giving the ECB more room than the Fed to cut rates.
Yet supply constraints make it unlikely inflation will go back to being well below 2% like it was before the pandemic. We see the ECB holding rates well above pre-pandemic levels.
Outro: Here’s our Market take
Short-term U.S. Treasury yields have slid on expectations for deep Fed rate cuts, so we went underweight.
We’re neutral euro area government bonds and UK gilts as market pricing of rate cuts is more aligned with our view or can go further.
Closing frame: Read details:
blackrock.com/weekly-commentary
