BlackRock warns: 'Markets now accept rate cuts unlikely'

Investing.com - "We've been saying since the end of 2022 that rate cuts this year would be unlikely as inflation sticks around. Markets are waking up to our view as a look under the hood reveals signs of weaker growth in major economies and market weakness due to rate hikes."

This is one of the main conclusions of BlackRock's (NYSE:BLK) latest weekly market report. "Debt ceiling talks and the U.S. Treasury potentially being unable to pay its bills by early June have added to recent market volatility," they add.

"We like quality in portfolios. We upgrade UK gilts to neutral as yields price in more rate hikes," these experts note.

As BlackRock explains, "stubbornly high inflation has prompted the Fed's fastest rate hike campaign since the 1980s. Markets are no longer pricing in repeated Fed rate cuts, a sign they're grasping inflation's persistence, in our view."

The company's analysts highlight that "Data last week showed Germany has entered recession even with a smaller-than-feared energy shock."

They also added: "In the U.S., GDP has held up but it has arguably entered recession based on gross domestic income, which assesses the economy’s performance on an income rather than spending basis. A deeper look reveals stocks reflect worsening growth: The S&P 500 index was up nearly 10% so far this year (dark orange line in the chart)."

"We see the Fed nearing a pause in rate hikes and living with some inflation to avoid the deep recession needed to get inflation near its target. But we don’t see the Fed coming to the rescue of a faltering economy with rate cuts later this year due to the sharp trade-off between inflation and growth," explains BlackRock.

As for Europe, these analysts believe that "the European Central Bank will hike more, regardless of the economic damage. The Bank of England (BOE) is in a similar position. Markets have priced in as many as four more BOE hikes. We think that might be a bit overdone, as it would be equivalent to the Fed hiking to around 7-7.5% – enough to trigger a severe recession."

"Bottom line: Markets are reassessing policy rate expectations as sticky inflation makes clear central banks won’t cut them this year – or will keep hiking. We turn to high quality sources of income in the short term and stay cautious on risk assets," they conclude.

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