'We Don't See Any Fed Rate Cuts': BlackRock Goes Overweight Inflation-Linked Bonds, Stays Underweight Stocks As Damage Looms

The Fed is not likely to cut interest rates, despite what markets may be anticipating, according to BlackRock Inc. BLK.

In a Bloomberg interview on Tuesday, Wei Li, chief investment strategist at BlackRock, said that “the economy is resilient and a recession will be pushed out later” and thus markets are wrong in pricing rate cuts down the road.

‘No Fed Rate Cut’: Blackrock Takes An Out-Of-Consensus Call

“We don’t see rate cuts this year – that’s the old playbook when central banks would rush to rescue the economy as recession hit,” the strategists said. “We see a new, more nuanced phase of curbing inflation ahead: less fighting, but still no rate cuts.”

Markets have been quick to price in rate cuts as a result of the banking sector turmoil and the Fed signaling a coming pause, but BlackRock expects no rate cuts this year by the Fed.

Fed futures currently price in 13 basis point of implied rate hike in May, which corresponds to a 50% probability of a hike, followed by 90bps of rate cuts (almost four 25bps of cuts) by January 2024.

BlackRock states that a more serious credit crunch or even a stronger-than-expected recession is needed for the Fed to cut rates as much as the market is pricing now.

BlackRock Is OW Linkers, UW Nominal Long-Term Bonds And Stocks

“Inflation is likely to prove even stickier than the Fed expects without a deep recession, and services inflation will keep core inflation elevated,” is the view shared by BlackRock in its latest weekly market commentary. This is the reason why the asset manager remains overweight on inflation-linked bonds and prefers them to nominal long-term bonds.

BlackRock manages the iShares TIPS Bond ETF TIP, an exchange traded fund that invests in inflation-protected public obligations of the U.S. Treasury.

BlackRock also said to consider very short-term government paper attractive for income, given the potential for the market to price out rate cuts quickly. The iShares 1-3 Year Treasury Bond ETF SHY is an exchange traded fund managed by BlackRock, that invests in U.S. treasury securities that have a remaining maturity of greater than or equal to one year and less than three years.

The world's largest asset manager reiterated its decision to remain underweight developed market stocks because they do not believe those equities reflect the damage that is expected.

Price performance of iShares TIPS Bond ETF (TIP) and iShares 1-3 Year Treasury Bond ETF (SHY) since the banking crisis – Chart: TradingView

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