BlackRock's Rieder: Market showing something I've never seen

Market uncertainties have emerged from multiple economic headwinds — escalating geopolitical conflicts, chaos in Congress, and expanding labor strikes, among others. Divergences between the stock and bond markets have investors second-guessing where they should focus their attention.

BlackRock Global Fixed Income CIO Rick Rieder joins Yahoo Finance to give his insights on how to wade through the complexities of this new territory developing between stocks and bonds, and what the Federal Reserve's next move may be to quell these emerging developments.

Rieder says that, in his career, he has "never seen a greater divergence in technical conditions between bonds and stocks." "The technicals in the equity market are unbelievably good," Rieder adds.

When it comes to the Fed, Rieder says the central bank "is more tolerant of how much they've raised rates, and is more willing to look at the data, look at the lagged effects for monetary policy," adding that his sense "is net-net, I think long-end interest rates could move a bit higher than where they are today, but I think where you're starting to see people put money, shorter-term interest rates... the income you get is amazing."

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Video transcript

BRAD SMITH: Well stocks have been struggling to shake off the downbeat mood. Increasingly hanging over asset classes. The risk of a government shutdown, the ongoing UAW strike negotiations. And rising energy costs have left investors feeling more pessimistic about what's in store for the economy. The bright spot could be earnings season, but it's been something of a mixed bag so far, though, the last couple of days, offering some room for optimism, cautious optimism as it may be.

Our next guest says heightened risks are causing sharp divergences in financial markets. So now what? Joining us now, we've got Rick Rieder, BlackRock Global Fixed Income Chief Investment Officer. Rick, how would you describe where this earnings season, perhaps, can give us a little bit more clarity around broader financial markets?

RICK RIEDER: Well, that's a great question. So first thing I would say is, there's dispersion. Even last night, like you say, the numbers that came across in terms of cloud performance, in terms of broader technology performance, there's real dispersion. We're getting a series of conflicting signs around markets, it's why markets are so jumpy, so uncertain. Why the depth? When you go to transact in rates markets, risk markets, the depth of markets is really shallow.

So listen, I think the one thing you take away from it, when you read some of these earnings, particularly some of the consumer data that we're getting, economy is moderating very slowly. There's still some pockets of significant strength, but the economy is moderating, and it's still in a pretty good place. One of the things central banks have to work with is, the economy is still in pretty good shape, although if you said to me, what's the first derivative of change, it's a bit slower, and I think the earnings are representing that.

SEANA SMITH: Rick, when it comes to what's going on with equities right now, and comparing that to what's going on within the bond market, obviously yields a massive run up that we've seen have certainly been a driver here of the recent action in equities, when we take a look at whether or not there's this debate right now whether or not the sell-off has been overdone in bonds, where do you stand on that?

RICK RIEDER: So in my career, I've never seen a greater divergence in technical conditions between bonds and stocks. so first of all, stock market, I think the number is $800 billion in authorized stock buyback this year, the IPO calendar, I think, year-to-date, is $19 billion. So we put that in perspective, $800 billion's a stock buyback away from what individuals do, and only $10 billion are IPOs.

The technicals and the equity market are unbelievably good. Then you take the bond market, where we're getting $400 billion a week of Treasury bills, and like this week $150 billion of coupons. So this week alone, we're going to get somewhere between 550 and $600 billion of supply in a week. So the technicals are incredibly disparate.

Listen, I think could rates move a bit higher than where they are today? They could, certainly given the fact that we're getting so much supply. Listen, I think you have to balance that with we're now getting a shift in Fed very slowly, but is more tolerant of how much they've raised rates, and is more willing to look at the data, look at the lagged effects of monetary policy. So my sense is net net.

Listen, I think long-end interest rates could move a bit higher than where they are today. and I think where you're starting to see people put money, shorter term interest rates, even out to the belly of the curve, we call it around the five-year point, and the income you get is amazing. And that's why you're starting to see people shift and be more tolerant, even though the Fed, their next move would probably be hike versus ease, the carry and the income you get in fixed income today, without taking a lot of long-term interest rate risk, is pretty attractive.

SEANA SMITH: Rick, the recent data points that we have gotten though, have been a bit conflicting, when you take a look at the fact that inflation has been rising, although just modestly here. Do you think that downward inflation trend, is that still intact? Is it enough for the Fed, do you think, to stay on hold at this point, or should it be enough?

RICK RIEDER: So it's a great question. So if you take the six-month moving average of inflation, you get really comfortable that you're running core CPI, I believe it's around 3 and 1/2, that number, we've come down from what, very high single digits. You'll get things like core goods, a six-month moving average, is pretty much close to zero. That number was up at 12, 13% for core goods.

The problem is, service level inflation is sticky high. You look at things like insurance prices, and then which factor into the CPI report, they're still sticky high. And there are other parts of services that are still hard to bring down. So what does that mean?

Listen, inflation is coming closer to target. We think core PCE, that's the number that the Fed focuses on. We think by the end of the year it's about 3.3%, next year, beginning of the year, it's closer to the high 2's, 2.7, 2.8. So the trend is right. The Fed's target is 2, we're not there yet.

But I think, because we've moved so much, and the momentum is in the right direction, and the economy is moderating, it'll allow the Fed to relax, and let's watch the data and hope this trend will continue to manifest itself. Our sense is, not without some bumps in the road, that we're moving closer to an inflation level that's higher than historically, but still tolerable for the Fed and other central banks.

BRAD SMITH: What do you believe that the prevailing tone from the Fed will be in 2024, considering the data that's come through, considering how they're waiting for much of the policy that's been enacted thus far, to still be ingested, and to ultimately try and make sure that there still is the achievement of a soft landing no recession scenario?

RICK RIEDER: So my sense is, the first half of the year, the Fed is a watcher, and is viewing the data, and hoping that the trends continue around. By the way, I'm not sure there's even a soft landing, I'm not sure there's even a landing. We think we think GDP next year is going to be-- real GDP is 1 and 1/2 or so, not bad. So whatever soft landing is, I just think we're just moderating to a reasonable growth paradigm.

And so I think the Fed's going to watch,. But then as you get in the second half of the year, Chair Powell said in the press conference, that if real rates, he's focused on real rates, if inflation is at this level-- So we talk about core PCE, let's say it's 2 and 3/4-ish, we can't have the funds rate sit at, if particularly the economy is moderating, employment is not at the accelerated pace, you can't have a funds rate that's 5 and 1/2, 5 and 5/8ths, because the real rate less the rate of inflation is too high, so meaning the Fed's got to start cutting rates in the second half of the year. And I think that's what they'll do. But I think in the first quarter, the second quarter, I think it's a lot of watching the data and hoping that things work out the way they should.

SEANA SMITH: Rick Rieder we got to leave it there. We always really appreciate your insight. Look forward to having you back soon. BlackRock a Global Fixed Income Chief Investment Strategist. Thanks so much.