With US relations fractured globally, inflation is likely to reach nearly 3%.
investment giant BlackRock Inc.BLK;
presents one of the most compelling strategic demands of the moment. As the world becomes increasingly fragmented into competing blocs, inflation is likely to remain close to 3%.
Attacks by Yemen’s Houthis on shipping in the Red Sea and the U.S.-led response are rerouting oil tankers and cargo ships, driving up shipping costs. Meanwhile, Taiwan’s January 13 election to elect a new president whose party supports Taiwan’s independent identity will do little to soothe U.S.-China relations.
Read: Oil traders unfazed by Middle East shipping attacks. Here’s why: And there is less than a year left until the inauguration. Here are the stock market lessons learned from 134 elections in 17 countries.
Geopolitical fragmentation is accelerating, in stark contrast to the era of widespread globalization following the Cold War, according to Wei Li, chief global investment strategist, and others at the BlackRock Investment Institute. In recent years, the world has leapt from one crisis to another, starting with former President Donald Trump’s trade war with China and the COVID-19 pandemic.
New York-based BlackRock, the world’s largest asset manager with $10 trillion under management at the end of the fourth quarter, is rising to levels last seen ahead of Russia’s invasion of Ukraine in February 2022.
BlackRock Geopolitical Risk Index, 2018-2024
Source: Includes BlackRock Investment Institute, LSEG and Dow Jones data.
“Geopolitical fragmentation, one of the five superpowers or structural changes we track, is emerging from recent events in Asia and the Middle East,” the BlackRock Investment Institute team wrote in a note Monday. “Fragmentation is a key reason for persistent inflationary pressures, keeping policy rates above pre-Covid levels.”
“Conclusion: We expect deeper divisions, increased competition, and reduced cooperation among major countries in 2024,” the team said. Additionally, “we are seeing a rewiring of globalization that benefits countries like Mexico and Vietnam that are acting as intermediate trading partners between different geopolitical blocs.”
Investors and traders entered 2024 with confidence that U.S. inflation would head toward 2% and that the Federal Reserve could cut interest rates for up to seven quarters. Most of these interest rate cut expectations had to do with the decline in oil prices last year.
As of Monday, oil prices remained range-bound, risking masking a surge in shipping prices caused by the Red Sea conflict and putting broader price pressures. In particular, since the Israel-Hamas war began last October, the geopolitical risk premium was not reflected in crude oil as it included the US benchmark, WTI CL00.
CL.1,
It is trading at about $19 a barrel, below the 2023 high set in late September.
“Inflation will remain close to 3% under the new regime,” the BlackRock team said, joining a growing number of financial market participants who have warned of the risk of continued price rises.
That list includes James Solloway, chief market strategist and senior portfolio manager at Pennsylvania-based SEI, and Brent Schutte, chief investment officer at Northwestern Mutual Wealth Management Co. Long-term inflation expectations have risen further.
See also: Will there be no interest rate cuts in 2024? Why investors should think about the ‘unthinkable’. As bond market inflation expectations rise, traders have given up on the Federal Reserve’s March interest rate cut.
An inflation rate of 2% is a level the Fed defines as consistent with its goals of full employment and price stability, and failure to achieve this on a sustainable basis could call into question the central bank’s institutional credibility. Inflation, as measured by the annual headline rate of the Consumer Price Index, remained above 3% for seven straight months through December. This suggests that traders are not basing their current expectations on a 5-6 quarter point rate cut. In 2024.
Traders and investors on Monday were mostly focused on the build-up to fourth-quarter earnings season. In morning trading in New York, the three major stock indices, DJIA SPX COMP, all rose. Meanwhile, 2- BX:TMUBMUSD02Y and the 10-year Treasury yield BX:TMUBMUSD10Y are down from their highest levels reached this year on Friday.
