Jeff Rosenberg: There Is A Lot Of Complacency In The Market; The ECB Is Continuing The Financial Repression

Markets are not ready for a change in the message from the Federal Reserves, Jeff Rosenberg, BlackRock’s Chief Investment Strategist for Fixed Income said in an interview with Bloomberg.

“The biggest What if? that we have in front of us is: what if we hear a different message out of the Fed next week?”, he said.

Rosenberg believes that markets are not ready for the Fed changing its message should the labor markets improve. He has also stated that there is “a lot of complacency going on” in the market, pointing to low volatility across the board and a tighter correlation between stocks, bond, currency and commodity markets.

Jeff Rosenberg admits that he was forced to adjust BackRock’s outlook for the bond market more often during the past 6 months due to the constant “flip-flopping” from the Fed. “It hasn’t been a great record for a bond strategist forecast the direction of interest rates”, he has concluded. Nevertheless, Rosenberg insists it is important to pay attention to what the Fed says, as it has a powerful influence over the bond market.

“There is a shortage of bonds”, according to Rosenberg. Despite a decrease in private sector borrowing and a healthier market for municipal bonds, the “government related debt is still at historically large levels of deficit in the United States”. When discussing the situation in Europe, Rosenberg has stated that Mario Draghi and the European Central Bank are continuing the financial repression by providing a “tremendous amount of new money creation”. He argues that, as a result, the prices in Europe are reflecting the effect of central bank actions to a larger extent than the effect of actions of private actors.

“In Europe [...] they are getting further into financial repression. The good news in the US is that we could be exiting financial repression and getting towards more normalization in interest rates”, Rosenberg said.

As a consequence, interest rates will distance themselves from the zero level, according to him. Rosenberg also points to potential risks related to US interest rates rising, while rates in the rest of the world stay close to zero. With the Fed, the Bank of England and ECB acting in a coordinated manner for the past 3-4 years, a decoupling of the Federal Reserves is expected to bring volatility in the currency markets, while the dollar should go higher, according to him.

Disclosure: none.

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