UBS conversations: Blackstone CEO on the evolution of private market investing (9:23)
CIO Mark Haefele and Blackstone CEO Steve Schwarzman dig into the business cycle, investment strategies, and key opportunities right now.

Thought of the day

The global rate-cutting cycle appears unlikely to follow a straightforward path. Consumer prices in Canada took an unexpected turn and rose in May, after showing signs of consistent cooling since the start of the year and a first rate cut by the Bank of Canada earlier this month. Australia’s inflation also jumped to a six-month high in May, with a key measure of core prices rising for a fourth month.

Money markets now see only a 45% chance of a rate cut in July by the Canadian central bank, from over 70% earlier this week, while the market-implied chance of a quarter-point hike from the Reserve Bank of Australia (RBA) by September has risen to 50%, from 12% before the data.

Noisy inflation data may be sufficient to keep policymakers cautious in their moves, but the global disinflationary process is well established, in our view. Easing price pressures and other economic considerations should encourage central banks to start or continue cutting rates.

Growth matters as much as inflation. Central banks are typically mandated with maintaining low inflation and steady GDP growth. In today’s context, this means policymakers are trying to strike a balance between keeping monetary policy restrictive enough to tame inflation but not so restrictive that it paralyzes economic growth. RBA Governor Michele Bullock highlighted this challenge last week, saying it’s not obvious what to do with rates to balance risk on both sides. The country’s momentum in economic activity is weak, including slow GDP growth, a rise in the unemployment rate, and slower-than-expected wage growth. We still see the RBA’s next move as a 25-basis-point cut in February 2025.

The direction, rather than the timing, of policy changes is more important. Four central banks have begun to ease policy, and we think this is the start of a cycle that should see rates some 150 to 200 basis points lower from the peak by the end of 2025. In the US, while Federal Reserve Governor Michelle Bowman this week said keeping policy on hold for some time is likely necessary, we believe incoming data on inflation, growth, and the labor market will justify a first cut in September. Across the Atlantic, a growing number of policymakers at the Bank of England highlighted that their decision to remain on hold last week was finely balanced, and we expect the European Central Bank to ramp up policy easing in the coming months.

The end point of the rate-cutting cycle may be deeper than expected. While the medium-term outlook for interest rates suggests they will remain positive through the cycle, they are likely to be at levels much lower than they are today. We think the market may be placing too much emphasis on the high-inflation, high-rate environment of the last two and a half years, and overlooking the ultimate destination of the rate-cutting cycle. For example, Fed officials put their latest estimate of the longer-run fed funds rate at 2.75%, but current market pricing suggests that rates will be cut to around 4%. We think markets will start to price a lower level of long-term interest rates going forward.

So, we continue to see opportunities in the fixed income market in a lower-rate environment. Investors should invest cash and money market holdings into high-quality corporate and government bonds, and consider bond ladder and structured investment strategies to manage their liquidity. Overall, we think that a balanced and diversified portfolio across fixed income, equities, and alternative investments can best help investors position for long-term financial goals while navigating near-term uncertainties.