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Weekly market commentary

U.S. & Japan: a tale of two overweights

Market take

Weekly video_20240318

Nicholas Fawcett

Opening frame: What’s driving markets? Market take

Camera frame

Inflation is in the spotlight again, thanks to some recent data surprises and the U.S. Federal Reserve and Bank of Japan both holding meetings this week.

Title slide: U.S. & Japan: a tale of two overweights
Markets see a positive near-term macro backdrop in the U.S. and Japan. We eye risks for both ahead – but for different reasons.

1: U.S. inflation
U.S. inflation has eased over the past few years thanks to rapidly falling goods prices.

Inflation will likely fall further toward 2% this year, in our view. But persistent services inflation will likely pull it back up in 2025 as the drag from falling goods prices fades. We see U.S. inflation settling closer to 3% than 2% over the medium term, as a result.

2: Market sentiment
Markets are, for now, comfortable that U.S. inflation will cool enough to allow the Fed to make three quarter-point rate cuts this year.

We think upbeat market sentiment can persist as inflation cools and rate cuts come through.

3: BOJ policies
The Bank of Japan, meanwhile, is focused on keeping inflation sustainably at 2% after decades of low or no inflation.

 We expect the BOJ to end its emergency policy of negative rates, but to remain cautious - and not start tightening policy too aggressively.

Outro: Here’s our Market take
We’re overweight U.S. and Japan stocks.

Yet resurgent inflation in the U.S. could spoil sentiment. So we stay nimble.

Japan’s outlook remains positive to us as we don’t think the BOJ will raise rates aggressively and given ongoing corporate reforms.

Closing frame: Read details:

www.blackrock.com/weekly-commentary

Different macro outlooks

Markets see a positive near-term macro and corporate backdrop for the U.S. and Japan. We eye risks ahead but remain overweight stocks in both countries.

Market backdrop

U.S. stocks were largely flat last week after hotter-than-expected inflation data. Both 10-year U.S. Treasury and Japanese government bond yields rose.

Week ahead

The Fed policy decision is in focus this week. We see Fed rates staying higher for longer than pre-pandemic. We watch how the Bank of Japan interprets inflation.

Federal Reserve and Bank of Japan (BOJ) meetings this week and recent data put a spotlight on the U.S. and Japanese macro environments. U.S. markets are pricing in a positive macro backdrop as inflation cools. We don’t see upbeat risk appetite being seriously challenged in coming months. By contrast, Japan’s macro and corporate outlook is positive longer term. We see the BOJ simply ending negative interest rates, not starting to tighten. We stay overweight U.S. and Japan stocks.

Download full commentary (PDF)

Market backdrop

U.S. stocks retreated from near all-time highs to end the week largely unchanged, surrendering gains after the U.S. CPI and other inflation gauges surprised to the upside. U.S. 10-year yields jumped more than 20 basis points to near 4.30% after February CPI was hotter than expected, prompting markets to price out Fed rate cuts. Japanese 10-year yields reached this year’s high near 0.8% as markets eye an end to negative rates this week. U.S. crude oil prices gained 4% on supply concerns.

The Fed policy decision is the main event this week. Although markets don’t expect the first rate cut until midyear, we think they’ll focus on how the Fed is responding to recent higher-than-expected inflation data. Markets may also assess whether Fed projections indicate a more persistent inflation outlook. Meanwhile, the BOJ could end its negative interest rate policy as soon as this week, with markets pricing a small hike. We also await the Bank of England policy decision.

Week ahead

The chart shows that Brent crude are the best performing asset year-to-date among a selected group of assets, while the 10-year U.S. Treasury yield is the worst.

Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from LSEG Datastream as of March 14, 2024. Notes: The two ends of the bars show the lowest and highest returns at any point year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in U.S. dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE U.S. Dollar Index (DXY), spot gold, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (U.S., Germany and Italy), Bank of America Merrill Lynch Global High Yield Index, J.P. Morgan EMBI Index, Bank of America Merrill Lynch Global Broad Corporate Index and MSCI USA Index.

March 19

BOJ policy decision

March 20

Fed policy decision; UK CPI; euro area consumer confidence

March 21

BOE policy decision; global flash PMIs; Japan trade data

March 22

Japan CPI

Read our past weekly market commentaries here.

 

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Meet the Authors
Jean Boivin
Head – BlackRock Investment Institute
Wei Li
Global Chief Investment Strategist — BlackRock Investment Institute
Nicholas Fawcett
Macro Research – BlackRock Investment Institute
Tara Iyer
Chief U.S. Macro Strategist – BlackRock Investment Institute