Inflation won't come close to the Fed's target, and investors buying the dip in stocks should not hope for policymakers to save them, BlackRock says
Inflation isn't on track to fall anywhere near the Fed's 2% target, BlackRock said in a note.
Strategists pointed to rising core CPI, which suggests inflationary pressures haven't abated.
"Rate cuts are not on the way to help support risk assets, in our view," strategists said in a note.
Inflation won't come down to the Fed's 2% target, and investors who are buying the dip in stocks shouldn't be hoping that central bankers will cut rates and spur a rally, according to BlackRock.
"Inflation in the US is not on track to settle anywhere close to the Federal Reserve's 2% target, in our view. That was reinforced by March inflation data," strategists said in a note on Monday, referring to last month's Consumer Price Index report, which showed prices climbed 5% in March on an annualized basis, down from February's reading of 6%.
Though that increase was lower than economists' estimates, prices are still well above the Fed's long-run inflation target. Meanwhile, core CPI, which excludes volatile food and energy prices, increased 5.6% year-over-year in March, suggesting inflationary pressures are still present in the economy.
That could mean Americans will have to live with high prices for years, strategists said previously, and it suggests central bankers are likely to keep interest rates high this year. That bodes poorly for the outlook for the stock market. Fed officials have aggressively raised interest rates over the past year to lower inflation, a move that's threatened to push the economy into a recession and caused the S&P 500 to sink 20% in 2022.
Markets are now pricing in an 86% chance that the Fed hikes rates another 25 basis-points at the next policy meeting in May, according to the CME FedWatch tool. Another 25 basis-point hike would raise the Fed funds target range to 5-5.25%, the highest interest rates have been since 2007.
"Recession is foretold as central banks try to bring inflation back down to policy targets," strategists said, warning investors who are flocking back to the stock market as asset prices rebound. "Rate cuts are not on the way to help support risk assets, in our view. That's why the old playbook of simply 'buying the dip' doesn't apply in this regime of sharper trade-offs and greater macro volatility," the note added.
Other Wall Street commentators have flagged the rising risk of a recession this year, which could continue to weigh on stocks. Bank of America warned last week that the market still has plenty of downside ahead, as 80% of recessions since 1933 have sent stocks plunging at least 20%.
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