The difficult position the Fed finds itself in spurred BlackRock, the world's largest asset manager with nearly $10 trillion under management, to downgrade US stocks to "neutral" on Monday.

"The Fed's hawkish pivot has raised the risk that markets see rates staying in restrictive territory. The year-to-date selloff partly reflects this, yet we see no clear catalyst for a rebound," BlackRock said. "If they hike interest rates too much, they risk triggering a recession. If they tighten not enough, the risk becomes runaway inflation. It's tough to see a perfect outcome." 

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And recent hawkish comments from Fed Chairman Jerome Powell last week signal that the Fed will do whatever it takes to stop the continued rise in inflation, as he still sees a strong labor market and resilient consumer as surviving a spate of rate hikes.
That quick pace of rate hikes by the Fed, combined with plans to reduce its balance sheet starting next month, means that it will be harder for central banks to come to the rescue and halt a growth slowdown in the economy by cutting interest rates and buying assets like it's done in prior periods of economic slowdowns, BlackRock said.
"We expect China's deteriorating economic outlook to be a drag on global growth – and we think consensus forecasts for China's 2022 GDP growth are likely to get revised down," BlackRock said. 

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Trade accordingly with your risk

 

 

The Bank of England needs to tighten policy further to fight rising inflation, but it’s also wary of acting too quickly and risking pushing the UK into recession, according to Chief Economist Huw Pill.

Pill, who has voted with the majority to hike rates at each of the BOE’s previous four meeting, told the Western Mail newspaper that he expects “over the coming months some further moves in the direction we have been seeing.”

“I personally think there is more that needs to be done in this transition from what has been a very supportive monetary policy for the economy really going back to the financial crisis, through the fallout from Brexit and the pandemic,” he said, according to the newspaper. “And we need to go not necessarily to a super restrictive stance, but to a stance that takes some of that support away and is more reflective of the fact inflation is higher and labor markets tighter.”

The BOE is grappling with an inflation rate that is at a four-decade high and predicted to go even high, and an economy that is forecast to slowdown as the cost of living crisis saps demand. That means there are risks if the bank acts too slowly, or too quickly, Pill said.

“When you think about that in terms of policy too much runs the risk that you fall into and get stuck in a deep recession, which is very costly and too little you run the run risk that inflation gets this self-sustaining momentum and runs away from the target,” he said.   

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The euro’s weakness on currency markets could threaten the European Central Bank’s efforts to steer inflation towards its target, ECB policymaker Francois Villeroy de Galhau said on Monday. The euro’s weakness makes imported dollar-denominated goods and commodities  like oil  more expensive, fuelling price pressures that have already driven euro zone inflation to record levels.

“Let me stress this: we will carefully monitor developments in the effective exchange rate, as a significant driver of imported inflation,” Villeroy told a conference at the Bank of France, which he also heads. “A euro that is too weak would go against our price stability objective.”

Villeroy said that a “decisive” ECB governing council meeting could be expected in June followed by an “active summer” on the monetary policy front.

“The pace of the further steps will take into account actual activity and inflation data with some optionality and gradualism,” he said.

Policymakers should “at least move towards the neutral rate”, he added, at which the central bank’s monetary stance is neither stimulating the economy nor holding it back. 

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Increase in savings and fixed mortgages weaken transmission. Former government adviser says higher rates needed for longer.
The Bank of England is being warned it may have to hike interest rates higher than investors expect, even as the risk of recession mounts, in part because it has lost much of its power to control. 

 

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 In a speech Thursday , Gravelle reiterated that rates need to rise further into the neutral range of 2 to 3% in order to cool domestic inflation and bring the economy back to balance.

“We are taking actions to normalize our policy rate quickly and are prepared to be as forceful as needed,” Gravelle said, according to prepared remarks.

Gravelle said the central bank may pause increases to interest rates at the neutral range if price pressures begin to reverse course, or if heavily indebted Canadian households reduce their spending by more than expected.

Conversely, the deputy governor also made the case for hiking borrowing costs above the neutral range if global supply chain issues persist, or parts of the domestic economy end up being less sensitive to higher interest rates than expected.

“We are not on a pre-set path of policy rate increases aimed at getting to a specific ‘terminal’ rate,” Gravelle said. 

The comments will firm up market expectations of a second jumbo rate hike at the bank’s next meeting on June 1, after a 50-basis point increase in April. Investors see Canada’s benchmark interest rate rising above 3% over the next 12 months in one of the most aggressive tightening cycles since the end of last century.

Speaking in Montreal, the deputy governor outlined how higher commodity prices, global supply chain issues, and the reopening of economies are pushing up inflation. Gravelle also said that the bank’s near-term forecasts for price gains are likely to be revised up, adding that “inflation pressures have been higher and more tenacious than we expected.”

 

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The relentless selling of the yen looks to have come to an end and some green shoots of positive commentary are beginning to appear. Goldman Sachs Group Inc. touted the currency as an ideal recession hedge and remarked on its ‘significant value’ in a note Tuesday.  Pace of yen selling has eased after two torrid months. 

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Currency is cheap and an ideal recession hedge: Goldman

 

 

Some market participants are anticipating a July rate hike, with reports than more hawkish members of the ECB are keen to raise rates sooner rather than later.

Rates in the euro zone have been negative following the region’s sovereign debt crisis, and the ECB has confirmed that it will conclude its net asset purchases in the third quarter  opening up the possibility of a rate hike.
The Governing Council is facing a dilemma with inflation hitting a record high of 7.5% in March and the economic growth outlook weakening due to the war in Ukraine.

The interest rate on the ECB’s main refinancing operations and the interest rates on the marginal lending facility and the deposit facility remains unchanged at 0.00%, 0.25% and -0.50% respectively. The U.S. Federal Reserve and the Bank of England, meanwhile, have both already embarked on their rate-hiking cycles. 

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Trade accordingly with your risk

 

The Japanese yen may continue to see weakness against the U.S. dollar if the policies of the Bank of Japan and Federal Reserve continue to diverge, according to Wells Fargo Securities.

The yen fell nearly 6% against the greenback in March, and is continuing to see losses in April.
The Japanese currency has struggled for gains against the dollar amid expectations the Bank of Japan will lag its peers such as the U.S. Federal Reserve in normalizing monetary policy.
The Japanese yen may continue to see weakness against the U.S. dollar if the policies of the Bank of Japan and Federal Reserve continue to diverge, said Wells Fargo 
“Assuming BOJ policymakers stay committed to their easy monetary policy framework, we think a move up towards maybe 135 [yen per dollar] could be likely within the very near future,” the foreign exchange strategists said.

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Despite the latest market bounce, Morgan Stanley is bracing for an S&P 500 decline of at least 13% between now and September.

“It does have all the hallmarks of what I would call a bear market rally,” said the firm’s chief U.S. equity strategist and chief investment officer. “Things got oversold.” 

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He also singles out the tech-heavy Nasdaq, which rallied almost 2% on Monday. It’s up more than 13% over the past three weeks. “The Nasdaq has run into resistance again here.... throwing back into the 200-day moving average,” he added. “It’s a good time to remain defensive because, look, we’re late cycle.” He has been worried the inflation surge and Federal Reserve’s tightening policy increases recession risks. It could create an environment, according to Wilson, where stocks perform worse than bonds.

“We don’t think there’s a recession this year. But maybe next year there could be one,” he said. “So, the markets are going to trade defensively.”

Morgan Stanley believes the S&P 500 will ultimately end the year at 4,400 — about a 9% drop from the index’s all-time high hit on Jan. 4.
“We’re doubling down on defensives,” wrote in his Monday research note. “Growth is becoming the primary concern for equity investors rather than higher rates.”

Morgan Stanley market playbook includes utilities, consumer staples and health care to outperform.

 

 

 

The Bank of Japan may have an opportunity to start normalizing rates this year, says BofA  In the near term, Japan’s central bank could make a one-off policy adjustment to increase interest rates and to give a “little bit more flexibility” for long-term yields to trade, said the BofA chief Japan economist.

Japan adopted negative interest rates in 2016 in an effort to combat decades of deflation by encouraging borrowing and spending. But the BOJ has struggled for years to meet its elusive inflation target, preventing the central bank from raising rates back to normal levels. But BofA expects the BOJ to end its negative interest rate policy at its October meeting and move the ceiling on its 10-year yield target to 0.5% from the current 0.25%.

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