Picture your Future. Save for it by earning 1.5% on a 1-year Term Deposit Account! Learn more.

BlackRock Commentary: 2022’s big change: Fed hikes rates

Jean Boivin, Head of BlackRock Investment Institute together with Wei Li, Global Chief Investment Strategist, Alex Brazier, Deputy Head and Elga Bartsch, Head of Macro Research, all forming part of the BlackRock Investment Institute, share their insights on global economy, markets and geopolitics. Their views are theirs alone and are not intended to be construed as investment advice.

Last year saw central banks living with inflation. This higher tolerance for price pressures, and the powerful economic restart, kept risk assets buoyant and limited the rise in yields. How central banks – particularly the Fed – respond to inflation will be the key story for 2022, in our view. We expect the Fed to raise rates but see its cumulative response to inflation as more muted than ever before. Yet the possibility that policymakers or investors misread the situation prompts us to trim risk.

Article image 1

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and not subject to fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from Bloomberg, December 2021. Notes:: The chart shows the U.S. nominal federal funds rate (orange line),  the projected path implied by the dot plot in the U.S. Federal Reserve’s latest Summary of Economic projections (yellow diamonds) and the path implied by market pricing. The green dotted line shows the path that would have been implied by a monetary policy rule linking the choice of policy rate to the rate of inflation and the level of the output gap.

 

2021’s powerful restart of economic activity resulted in severe price pressures and supply bottlenecks. In a stark departure from past practice of pre-emptive tightening, most developed market (DM) central banks did not respond when inflation and growth surged. Nominal bond yields rose, but not as much as inflation. This kept real yields deeply negative and supported equities, the hallmarks of our 2021 new nominal investment theme. The next phase of this story is playing out now. Most central banks are poised to nudge up policy rates – but this is taking the foot off the monetary accelerator, not hitting the brakes. We don’t see them responding aggressively to persistent inflation. Case in point: the Fed. It signaled three rate increases this year at its December meeting, noting high inflation, strong growth and labor market improvements. This is more than we expected, but what matters is the sum total of rate hikes. The Fed’s indicated policy response (yellow dots in the chart) is very mild compared with how it would deal with inflation in the past: a series of rapid-fire rate hikes that would have already began and would hoist the fed funds rate to near 4% over time (dotted green line).

In developed economies, we see the European Central Bank (ECB) keeping its foot on the accelerator while others such as the Fed prepare to pull back slightly. Importantly, no one is contemplating hitting the brakes – a factor for our modestly pro-equities stance and upgrade to U.S. equities. What matters next is whether DM central banks think their respective labor markets have returned to pre-Covid trends. Why? They may have an explicit employment mandate, like the Fed, or they use labor market conditions as a gauge for future inflationary pressures. This will play into the timing, pace and end point of policy hikes.

As we note in our 2022 Global Outlook, a unique confluence of events – the restart, new virus strains, supply-driven inflation and new central bank frameworks – are creating confusion as there are no historical parallels. Cutting through this confusion is key which is why we assess alternative scenarios to our base outcome and trim risk.

What are the risks to our base case? One is a delayed activity restart due to a global resurgence in Covid-19 infections. This could be particularly acute in China if its zero-Covid approach results in repeated activity shutdowns. We expect the People’s Bank of China to keep policy looser as a result, a shift already underway after last year’s economic slowdown.

We see two other risks, both negative for risk assets and fixed income. Central banks could revert to previous policy responses in the face of persistent inflation pressures. The Bank of England (BoE) – which in December became the first major DM central bank to raise rates since the pandemic struck – has made the most noise about responding more aggressively to inflation, leading markets to expect repeated rate hikes. The BoE may serve as a test case of a DM central bank coming closer to hitting the brakes, prompting the market to price in a risk of a policy reversal on rates by 2024. And inflation expectations could become unanchored from policy targets in the post-Covid confusion, forcing central banks to react aggressively. This could lead to stagflation: higher inflation becoming sticky amid stagnating activity. Understanding these potential outcomes around inflation and the market implications is key to cutting through confusion outlook theme.

Our bottom line: We expect interest rates to end at a lower level than in the past given higher inflation. That matters more for markets than what rates are going to do next year, in our view. We see the higher inflation regime and solid growth as positive for risk assets but bad for bonds for a second consecutive year – the new regime highlighted in our 2022 outlook.

Article image 2

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 Dec. 31, 2021. 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 U.S. dollars, and the rest in local currencies. Indexes or prices used are, in descending order: spot Brent crude, MSCI USA Index, MSCI Europe Index, ICE U.S. Dollar Index (DXY), MSCI Emerging Markets Index, Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, spot gold, Refinitiv Datastream Italy 10-year benchmark government bond index, Bank of America Merrill Lynch Global Broad Corporate Index, Refinitiv Datastream Germany 10-year benchmark government bond index and Refinitiv Datastream U.S. 10-year benchmark government bond index.

 

Market backdrop

Global stocks ended 2021 up 19% while global fixed income fell 5%. We expect a repeat of this unusual combination in 2022, albeit with more moderate equity returns. The reason is the historically muted policy and market response to inflation. The Fed confirmed this at its meeting last month. This should keep real yields negative and support equities. We see inflation settling at a level higher than pre-Covid even as pressures from supply bottlenecks ease.

Week Ahead

  • Jan. 5 – Germany, euro area, U.S. PMIs
  • Jan. 6 – Japan CPI and services PMI, Germany industrial orders, U.S. jobless claims
  • Jan. 7 – U.S. non-farm payrolls; China trade data ; Euro area inflation

U.S. employment data will be the key indicator for assessing whether the Fed follows through with its planned rate increases in 2022. A series of Purchasing Managers’ Indexes should give investors a read on the momentum of the restart. China’s trade data will give an indication of whether supply bottlenecks that have pushed up inflation are resolving.


BlackRock’s Key risks & Disclaimers:

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of January 3rd 2022 and may change. The information and opinions are derived from proprietary and non-proprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This material may contain ’forward looking’ information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader.

The information provided here is neither tax nor legal advice. Investors should speak to their tax professional for specific information regarding their tax situation. Investment involves risk including possible loss of principal. International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation, and the possibility of substantial volatility due to adverse political, economic or other developments. These risks are often heightened for investments in emerging/developing markets or smaller capital markets. 

Issued by BlackRock Investment Management (UK) Limited, authorized and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL.


MeDirect Disclaimers:

This information has been accurately reproduced, as received from  BlackRock Investment Management (UK) Limited. No information has been omitted which would render the reproduced information inaccurate or misleading. This information is being distributed by MeDirect Bank (Malta) plc to its customers. The information contained in this document is for general information purposes only and is not intended to provide legal or other professional advice nor does it commit MeDirect Bank (Malta) plc to any obligation whatsoever. The information available in this document is not intended to be a suggestion, recommendation or solicitation to buy, hold or sell, any securities and is not guaranteed as to accuracy or completeness.

The financial instruments discussed in the document may not be suitable for all investors and investors must make their own informed decisions and seek their own advice regarding the appropriateness of investing in financial instruments or implementing strategies discussed herein.

If you invest in this product you may lose some or all of the money you invest. The value of your investment may go down as well as up. A commission or sales fee may be charged at the time of the initial purchase for an investment. Any income you get from this investment may go down as well as up. This product may be affected by changes in currency exchange rate movements thereby affecting your investment return therefrom. The performance figures quoted refer to the past and past performance is not a guarantee of future performance or a reliable guide to future performance. Any decision to invest in a mutual fund should always be based upon the details contained in the Prospectus and Key Investor Information Document (KIID), which may be obtained from MeDirect Bank (Malta) plc.

Share on facebook
Share on linkedin

Experience better banking

The sooner you start managing your money, your way, using the best-in-class tools, the sooner you’ll see results. Sign up and open your account for free, within minutes.

Latest news articles

All News

BlackRock Commentary: Why we still prefer stocks over bonds

Equities have fallen hard this year on the prospect of rapid rate increases to rein in inflation, the tragic Ukraine war and a slowdown in China. BlackRock think equities remain more attractive than bonds, even as the historic sell-off in bonds has cut the gap between the two.

All News

Notes from the Trading Desk – Franklin Templeton

Given recent declines, there is much discussion around what is priced into market. With global markets declining for six consecutive weeks, there is an increasing debate over how much bad news is priced in, and whether markets are now oversold.

Login

We strive to ensure a streamlined account opening process, via a structured and clear set of requirements and personalised assistance during the initial communication stages. If you are interested in opening a corporate account with MeDirect, please complete an Account Opening Information Questionnaire and send it to corporate@medirect.com.mt.

For a comprehensive list of documentation required to open a corporate account please contact us by email at corporate@medirect.com.mt or by phone on (+356) 2557 4444.