BlackRock's Boivin Sees 2, 3 Interest Rate Cuts From the Fed in 2024

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Bloomberg Jan 10 12:03 · 17.9k Views

Jean Boivin, head of BlackRock Investment Institute, discusses the prospects for Japanese stocks and Bank of Japan policy. Boivin, who previously served as deputy governor of the Bank of Canada and associate deputy finance minister, also talks about Federal Reserve policy and its implications for financial markets. He speaks on "Bloomberg Daybreak: Asia."

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Transcript

  • 00:00 I just want to throw up this chart in terms of you know where the Nikkei 225 is trading
  • 00:03 and it it it already was quite a year for Japanese risk assets, but now we're seeing
  • 00:08 those stocks rallying to that 34 year high.
  • 00:12 Is the same premise still
  • 00:14 valid to you in terms of some of the reasons why Japan bulls last year thought this time it really is different,
  • 00:23 very much so.
  • 00:24 I think you
  • 00:25 know we've turned
  • 00:26 positive on Japan during the course of 2023 for the reason that we already discussed.
  • 00:30 I think the macro we were you know we have a very challenging macro environment we think in DM economies generally speaking globally, but that doesn't apply to Japan.
  • 00:38 The inflation dynamic is,
  • 00:41 is is a lot healthier in that in in that part of the world.
  • 00:45 Moreover, as you mentioned, the corporate governance
  • 00:47 push is real, continues to happen
  • 00:50 and we have the BOJ that has managed to move
  • 00:55 ever so slightly towards tweaking its policy framework without creating massive, massive disruption.
  • 01:00 So I think we are,
  • 01:02 I've seen some evidence that
  • 01:03 even like don't play the risk that you might have been concerned about.
  • 01:06 And so we think that has more to run into 2024
  • 01:10 and the reality is that Japan has done, has done well, but
  • 01:13 you know there's room to do better
  • 01:14 even when you compare to other markets,
  • 01:17 US, Europe
  • 01:19 on a relative basis that still has
  • 01:20 some catch up to play.
  • 01:24 How big is a risk that this is not just pertaining to Japan when it comes to BOJ expectations which again are shifting a little bit this week, but certainly Fed pricing, certainly pricing for some of these other central banks to cut this year.
  • 01:36 Do you think investors markets have gotten ahead of themselves?
  • 01:42 So
  • 01:43 yes, I do think but but the reality is we have had the
  • 01:48 very significant green light from I think the Fed in December
  • 01:52 where we have Chairman Powell that has basically
  • 01:56 fully endorse
  • 01:58 Immaculate disinflation, soft lending type of scenario as its base case.
  • 02:03 And while I don't think the
  • 02:05 this is a done deal, I think there's actually I don't.
  • 02:07 I think we're going to see something more complicated than that playing out during the course of 2024.
  • 02:12 The reality is that this is
  • 02:14 this is the kind of
  • 02:15 the scenario that the Fed is going with
  • 02:17 that has created a,
  • 02:19 you know the expectation that the Fed will be able to cut rates
  • 02:23 over the course of the next few months
  • 02:25 despite inflation not being back at 2:00.
  • 02:28 And that is that is that is now the big dynamic and I think that's going to create support for a risk asset for DM equities that I think as momentum
  • 02:36 can continue for for months.
  • 02:38 That said
  • 02:39 and to your point, I think the market has got ahead of themselves because we don't think inflation is resolved.
  • 02:44 It's going to go to two
  • 02:46 towards 2 and closer to AT2 in 2024.
  • 02:49 But we see
  • 02:50 eventually inflation coming back up towards 3 as we get closer to 2025.
  • 02:55 And that's going to be the thing to watch in 2024
  • 02:58 as this inflation narrative shift then I think market will realize that the aggressive cuts that are expecting will not materialize.
  • 03:04 So I think we're going to see 2-3 cuts from the Fed
  • 03:08 in 2024,
  • 03:10 not 6:00 or 8:00 as the market has been expecting over the last few weeks.
  • 03:16 You know 2023 was was a year we saw global assets really ultimately shrugging off the war in Ukraine, the ongoing war also
  • 03:24 in Gaza.
  • 03:25 If AUS China conflict would was to add
  • 03:29 to that picture, do you think global assets would be impacted meaningfully?
  • 03:36 Well, you know we believe that
  • 03:38 beyond just the macro backdrop that we're we need to pay attention to.
  • 03:42 Obviously this environment is is very different from what we've experienced for most of the decades prior to 2020
  • 03:49 and one of the reason is we have geopolitics that now is a thematic, it's a megaforce that
  • 03:55 investors need to grapple with.
  • 03:57 I don't think this is something that leads to necessarily a risk of environment.
  • 04:01 I think that's going to be driven more by Central Bank and you know if there's one lesson from 2023
  • 04:06 is that we've seen a lot of volatility but all driven by Central bank
  • 04:11 you know
  • 04:12 expectations.
  • 04:12 So I think that continues to be the the case for 2024.
  • 04:17 That said,
  • 04:18 geopolitics will be a concern that time might create some additional volatility but I don't think it creates
  • 04:24 a a different market environment
  • 04:26 overall.
  • 04:26 You're actually supposed to let
  • 04:28 the
  • 04:29 state.
  • 04:29 Are there any contrarian views that you think could
  • 04:33 shape up this year?
  • 04:34 Do you have any interest in exposure to Chinese equities?
  • 04:40 So in terms of contrarian views, I think as I mentioned, I think the main one is
  • 04:45 the market has been running aggressively with
  • 04:48 the soft lending view.
  • 04:50 The Fed has been underwriting this for now,
  • 04:53 but I think we are very much of the view that
  • 04:56 inflation
  • 04:57 while it's going to go to two.
  • 05:00 It it's going to be complicated because we're going to see
  • 05:03 all the news for now going in the direction where inflation is getting resolved.
  • 05:06 I think that's going to create additional momentum on markets and so on.
  • 05:10 But
  • 05:11 we already see at play
  • 05:12 dynamics that would bring inflation back up towards three.
  • 05:16 I think the labor market wages growth services price is not a story now, but we think it's going to be a story later this year.
  • 05:22 So that's contrarian compared to the market is expecting
  • 05:25 and so that leads us to you know see opportunities to be nimble now and
  • 05:29 you know be bullish,
  • 05:31 but at the same time the need to be able to pivot
  • 05:35 and one of our key team in 2024 in the investment outlook is grabbing the wheel,
  • 05:39 the need to be dynamic, active and you cannot set your portfolio and forget it for the entire year.
  • 05:45 So that's The thing is somewhat contrarian compared to the
  • 05:48 you know
  • 05:49 systematic optimism you see we've shared the near term but we think it's going to get a bit more challenging throughout the year.
  • 05:55 When it comes to China, I think our
  • 05:57 our biggest surprise in 2023 was
  • 06:00 the the restart that we thought would uncover very significant rebound and you know activity.
  • 06:06 And what we discovered was in fact that there was something missing and it was the animal spirit for consumers and investors in domestic consumers and domestic investors.
  • 06:15 And that has been revealed and I think Kelson to question,
  • 06:19 you know
  • 06:20 the
  • 06:21 appetite, the sentiment that the domestic
  • 06:23 consumers has about the future
  • 06:25 and that makes us more cautious now on China.
  • 06:29 So unfortunately not a contrarian view here.
  • 06:31 I think we're very much
  • 06:33 with the consensus that the outlook is more tricky for China.