This is from Blackrock (BlackRock is the world's largest asset manager, with circa US$9.5 trillion in assets under management) on the Federal Reserve, BoE and ECB:
We are in a new world shaped by supply. Major spending shifts and production constraints are driving inflation. Constraints are rooted in the pandemic and have been exacerbated by the war in Ukraine and China's lockdowns.
- The Fed increased rates by another 0.75% in July and reaffirmed projections of more rate rises with the aim to rein in inflation. The Fed is still looking through the lens of a typical late-cycle overheating as opposed to a restart, in our view. Reality will come knocking eventually, we think, and a stalled restart will prompt the Fed to change course.
- The Bank of England raised rates to 1.75% in August. It also acknowledged the growth-inflation trade-off — unlike other major central banks. It now sees a protracted recession through 2023, partly due to the energy shock. The ECB surprised with a larger-than-expected 0.5% rate rise in July. It also announced a new bond-buying facility to limit risks of higher rates causing the euro area to fragment.
- The ECB and markets underappreciate the risk of the energy crunch causing a recession, we think. The ECB will eventually accept this and rethink its rate path.
Investment implication: We are tactically underweight most DM equities after having further trimmed risk.
