Wall Street had trouble digesting Fed Chairman Jerome Powell’s words last night, at the meeting of the Economic Club of Washington. The stock indices went from declines to gains and then to declines again, and at the end of the day ended with gains that reached up to about 2%. The confusion of investors and traders is not surprising. Powell expressed himself in a “June” tone on the one hand, when he noted the cooling of inflation, “especially alongside the tight labor market,” and said that the Fed “expects that this year will see a significant decrease in inflation.” On the other hand, he did not spare any “hawkish” messages and made sure to repeat that the process The lowering of inflation is only at the beginning, that the road is still long, that the strong labor report surprised him as well, and that it is not impossible that the interest rate will rise beyond what the markets are pricing.
● Powell: “We expect that in 2023 there will be a significant decrease in inflation”
● Economists warn: the interest rate in the US may rise even beyond 5%
● Inflation in Europe was a pleasant surprise. Will interest rate hikes be curbed? | Analysis
In their weekly review, Blackrock’s investment institute experts refer to the “zigzags” of the central banks and point out that the conflicting messages confuse investors – who subsequently turn to stocks that do not price the economic damage and may suffer damage to their investment portfolios.
“The central banks have reached the nuanced stage of policy tightening,” the investment giant’s economists point out. “The drop in energy and commodity prices is pulling inflation down, but the tight labor market situation is keeping wage growth above the levels that will lead to a drop in core inflation to the 2% targets. We believe that the central banks are nearing the end of the hikes, but the major economies will still face a moderate recession and persistent inflation “.
The banks reached the second stage in the process: living alongside high inflation
Last week, we will recall that the Fed raised the interest rate in the US by 0.25%, to a range of 4.5%-4.75%. The next day, the interest rate also increased in the UK and the Eurozone by 0.5%, as expected, with better than expected inflation data in the background – where the consumer price index Decreased in January to 8.5% (below forecasts and a significant decrease compared to the reading of 9.2% in December).
Powell said last night that he was most concerned about the start of the decline in core services (excluding housing) inflation, “from the cost of an accountant to a haircut,” as he put it. “We have a significant path to lowering inflation to the 2% target,” added the governor, and warned that “the Fed may raise interest rates more than in priced markets, if employment reports continue to be unexpectedly strong and inflation climbs.”
BlackRock points out that last year, central banks took the position of “we will do whatever it takes to fight inflation” as a first step, with the second step being living alongside high inflation. “The mixed messages of the central banks show that they have reached the second stage before the extent of the economic damage is clear. Inflation is indeed cooling, but it is far from reaching the target. The Fed has also fallen into the second stage, Powell made it clear that interest rates will still rise and the fight against inflation is not over.”
At the same time, the investment house says, Powell also hinted that the Fed’s forecasts in December were not relevant enough, “a disconnect that indicates that the Fed may be approaching a pause in interest rate hikes, thus continuing to communicate vague messages to the market.”
“Preference for short-term government bonds and stocks in emerging markets”
The other major central banks in the world also face the same communication challenges. The President of the European Central Bank (ECB) Christine Lagarde did not repeat in the interest rate decision last week the statement that a mild recession “is not enough” to harm the inflation targets, “according to her, the risk of extremely high inflation has receded and lower inflation may reduce wage pressures”, explain in Blackrock. The Bank of England (BOE) raised the GDP forecast for 2023 and lowered the inflation forecast, and as mentioned, both banks raised interest rates by 0.5%, with the ECB expected to do so again in March.
“An earlier mild break by the Fed and the central banks in Europe and England will strengthen our view that they will face a ‘milder’ recession this year and will live with inflation that will drop significantly but stabilize above the target. This means that the central banks are not expected to lower interest rates as the markets expect,” warn Blackrock .
So what should be done with the investment portfolios in this situation? BlackRock notes that they now prefer high-quality credit, short-term government bonds and mortgage-backed securities due to long-term high interest rates. “We have a relative preference for emerging market stocks, which have outperformed developed market stocks so far this year, although many investors have recently turned to stocks The developed market is hoping for the recovery of growth and fearing to miss a return. This opinion is based on the assumption that these stocks are not fully pricing in the impact of the recession we anticipate going forward,” they say.