BlackRock Investment Institute stated on December 4 that recent data indicating a cooling U.S. labor market suggests the Federal Reserve may cut rates this month. This backdrop, combined with AI-driven thematic tailwinds, supports the institute's risk-on stance. While maintaining a neutral view on UK gilts, BlackRock favors them over other developed market bonds in the long term.
Delayed U.S. employment data for October and November (excluding October unemployment figures) will be released on December 16, potentially containing significant noise. The October report may reflect federal government-delayed layoffs, likely causing a sharp drop in overall employment—a scenario the Fed has presumably factored into prior decisions. Notably, this data will arrive after the Fed's December 10 policy meeting.
Markets have largely priced in a 25-basis-point Fed rate cut next week, a view BlackRock endorses. The institute argues that the current "no-hire, no-fire" stagnation could create room for further cuts in 2026—a contrast to earlier this year when strong job growth data sparked policy tensions between fighting persistent inflation and maintaining U.S. debt sustainability.
Though U.S. inflation remains well above the 2% target, the Fed has charted a clear easing path without reigniting such policy dilemmas. However, should inflation reaccelerate in 2024 due to rebounding economic activity or corporate hiring, these tensions may resurface, pushing long-term yields higher. BlackRock attributes part of this dynamic to America's chronically high fiscal deficits.
In stark contrast, the UK's latest budget aims to reduce deficits, even projecting a surplus within five years. The Chancellor's revenue-raising measures have unexpectedly expanded fiscal headroom, demonstrating Britain's balanced approach to market credibility and political accountability—despite tax revenues being on track to hit a record 38% of GDP by 2030.
BlackRock maintains a neutral stance on UK gilts given front-loaded spending and lagged tax impact in the new budget. Strategically, however, it favors UK debt over other developed market bonds for horizons beyond five years, partly due to Britain's lower neutral rate compared to peers.
With the Fed restarting its easing cycle, BlackRock has upgraded long-term U.S. Treasuries to neutral but advises tactical flexibility given persistent policy risks.
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