Stock surge to meet recession reality

Market insights from our partners at BlackRock.

Hope rally

Surging stocks show markets believe hopes of a soft landing by the Fed to be true. We disagree and stay underweight developed market (DM) stocks.

Market backdrop

Yields surged after more rate hikes and the UK’s fiscal splurge news. We cut UK gilts to underweight as we see higher rates and fiscal credibility questions.

Week ahead

U.S. and euro area inflation are likely to show persistence in data this week. We think central banks underestimate the cost of bringing it down to target quickly.

One economic release overshadowed the U.S. midterms for markets. Stocks surged last week after the October core CPI rose less than expected, stoking market hopes a Federal Reserve pause on rate hikes is nearer. That’s optimistic, we think. Goods inflation is easing as it needed to, but the labor constraints driving wage growth and core inflation persist. So the Fed is still on a path to create a recession via policy overtightening. Stocks aren’t pricing that in, so we stay underweight.

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