Global Weekly Commentary: Volatility a key feature of new regime
Volatile new regime
We see volatility as a constant in the new regime. We’re neutral long-term U.S. Treasuries because risks are more balanced after three years of rising yields.
Market backdrop
Stocks and bonds rallied last week on milder-than-expected U.S. inflation data. We see the U.S. economy on a weak growth path, with policy rates staying high.
Week ahead
Global PMI data this week will likely confirm that higher interest rates are causing business activity to stagnate. We don’t expect rate cuts this year.
The plunge in long-term U.S. Treasury yields last week on news of slowing U.S. inflation shows volatility is persistent in the new regime of greater macro uncertainty. Compounding this is a disconnect between the latest cyclical market narrative of a strong expansion – and the reality we have just climbed out of a deep economic hole caused by the pandemic. This disconnect risks obscuring the new regime’s opportunities – a key conclusion of our 2024 Outlook Forum last week.
Yield swings
U.S. government bond volatility, 2015-2023
Source: BlackRock Investment Institute, with data from LSEG Datastream, November 2023. Notes: The chart shows volatility in U.S. Treasuries based on the MOVE index. The series is shown in standard deviations from average during the period shown.
Stocks rallied, and yields on 10-year U.S. Treasuries tumbled 19 basis points last week – the biggest one-day move since the March U.S. banking turmoil. The drop came after news of a slower-than-expected pace of inflation. This is keeping bond volatility at much higher levels than before the pandemic, as the chart shows. The current market narrative: Inflation is falling while growth is holding up. We agree with the first part – for now. We see core inflation hitting the Fed’s 2% target in the second half of 2024. The problem: Inflation is falling because rapid rate rises to combat it have pushed U.S. growth trend below pre-Covid levels. We think more of the same is needed to keep inflation down as price pressures resume amid slowing labor force growth and geopolitical shocks. Markets appear to miss this bigger picture, and we see more volatility ahead as they swing between hopes for a “soft landing” and fears about higher rates and recession.
We upgraded long-term Treasuries to neutral on a tactical, six-to-12-month horizon last month because we now see even odds of yields swinging in either direction in this volatile environment. That’s in part because the Fed seems to be at the end of its rate hike cycle. Yet looser fiscal policy and slowing labor force growth will likely force the Fed to keep rates high for longer. Long-term yields should eventually resume their march higher. Why? We expect the term premium, or the compensation investors demand for the risk of holding long-term bonds, to keep rising amid greater macro volatility, large fiscal deficits and high debt issuance.
Looking ahead
Indeed, U.S. fiscal challenges have already contributed to volatility, and we see that playing out further. The U.S. government ramped up spending to restart the economy from pandemic lockdowns and launched other stimulus such as the Inflation Reduction Act. Bond issuance ballooned as a result. Higher interest rates are feeding into this cycle by raising government borrowing costs and adding to the debt burden. If borrowing costs stay near 5% as we expect, the U.S. government is poised to spend more on interest payments than on Medicare in a few years time. Investors are struggling to absorb the bond supply. Their indigestion spurred another surge in bond yields earlier this month after an auction for 30-year Treasuries saw historically weak demand.
Higher rates and volatility took center stage at our semi-annual Investment Outlook Forum held last week in New York. Some 100 BlackRock portfolio managers, executives and experts spent two days pinpointing investment opportunities and risks. Adapting portfolios to higher interest rates and mega forces – structural shifts such as geopolitical fragmentation and demographic divergence – were top of mind. Participants debated how to go beyond the obvious beneficiaries of mega forces, and highlighted granular opportunities within sectors and countries such as Japan. There was consensus that the new regime calls for selective and dynamic investment strategies, rather than static and broad exposures. And many saw wider dispersion of security returns – a feature of the new regime – and greater volatility opening opportunities to generate above-benchmark returns. Look for the details in our 2024 Global Outlook slated to come out in early December.
Bottom line
Volatility is a constant in the new regime, with markets quick to extrapolate single data releases. We believe the Fed is ending its hiking cycle – and is set to keep rates high for longer. This underpins why we have turned neutral long-term Treasuries and are overweight short-term Treasuries and European government bonds for income.
Market backdrop
U.S. stocks jumped about 2% last week, and 10-year U.S. Treasury yields slid sharply after the U.S. CPI data showed inflation slowing more than expected. Long-term U.S. yields have swung sharply – a reflection of the volatile new regime – after reaching 16-year highs last month as markets hope for sharp Fed rate cuts next year. We don’t think that is likely and see the Fed only starting to trim rates in the second half of 2024.
Global manufacturing and services PMI data out this week will likely confirm that higher interest rates are causing global production and business activity to stagnate. We think most developed market central banks will keep policy rates high for longer to lean against inflationary pressures – even as activity slows.
Week ahead
Nov. 23
Euro area, UK flash PMI
Nov. 24
U.S. flash PMI; Japan flash PMI, CPI
Source
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 Nov. 16, 2023. Notes: The two ends of the bars show the lowest and highest returns at any point in the last 12-months, 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.
© 2023 BlackRock, Inc. or its affiliates. All rights reserved.
General disclosure: This material is intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. The opinions expressed are as of Nov. 20, 2023, and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. This information is not intended to be complete or exhaustive and no representations or warranties, either express or implied, are made regarding the accuracy or completeness of the information contained herein. This material may contain estimates and forward-looking statements, which may include forecasts and do not represent a guarantee of future performance.
In the U.S. and Canada, this material is intended for public distribution. In EMEA, in the UK and Non-European Economic Area (EEA) countries: this is Issued by BlackRock Investment Management (UK) Limited, authorised and regulated by the Financial Conduct Authority. Registered office: 12 Throgmorton Avenue, London, EC2N 2DL. Tel: + 44 (0)20 7743 3000. Registered in England and Wales No. 02020394. For your protection telephone calls are usually recorded. Please refer to the Financial Conduct Authority website for a list of authorised activities conducted by BlackRock. In the European Economic Area (EEA): this is Issued by BlackRock (Netherlands) B.V. is authorised and regulated by the Netherlands Authority for the Financial Markets. Registered office Amstelplein 1, 1096 HA, Amsterdam, Tel: 020 – 549 5200, Tel: 31-20-549-5200. Trade Register No. 17068311 For your protection telephone calls are usually recorded. In Italy, for information on investor rights and how to raise complaints please go to https://www.blackrock.com/corporate/compliance/investor-right available in Italian. In Switzerland, for qualified investors in Switzerland: This document is marketing material. Until 31 December 2021, this document shall be exclusively made available to, and directed at, qualified investors as defined in the Swiss Collective Investment Schemes Act of 23 June 2006 (“CISA”), as amended. From 1 January 2022, this document shall be exclusively made available to, and directed at, qualified investors as defined in Article 10 (3) of the CISA of 23 June 2006, as amended, at the exclusion of qualified investors with an opting-out pursuant to Art. 5 (1) of the Swiss Federal Act on Financial Services ("FinSA"). For information on art. 8 / 9 Financial Services Act (FinSA) and on your client segmentation under art. 4 FinSA, please see the following website: www.blackrock.com/finsa For investors in Israel: BlackRock Investment Management (UK) Limited is not licensed under Israel’s Regulation of Investment Advice, Investment Marketing and Portfolio Management Law, 5755-1995 (the “Advice Law”), nor does it carry insurance thereunder. In South Africa, please be advised that BlackRock Investment Management (UK) Limited is an authorized financial services provider with the South African Financial Services Board, FSP No. 43288. In the DIFC this material can be distributed in and from the Dubai International Financial Centre (DIFC) by BlackRock Advisors (UK) Limited — Dubai Branch which is regulated by the Dubai Financial Services Authority (DFSA). This material is only directed at 'Professional Clients’ and no other person should rely upon the information contained within it. Blackrock Advisors (UK) Limited - Dubai Branch is a DIFC Foreign Recognised Company registered with the DIFC Registrar of Companies (DIFC Registered Number 546), with its office at Unit 06/07, Level 1, Al Fattan Currency House, DIFC, PO Box 506661, Dubai, UAE, and is regulated by the DFSA to engage in the regulated activities of ‘Advising on Financial Products’ and ‘Arranging Deals in Investments’ in or from the DIFC, both of which are limited to units in a collective investment fund (DFSA Reference Number F000738). In the Kingdom of Saudi Arabia, issued in the Kingdom of Saudi Arabia (KSA) by BlackRock Saudi Arabia (BSA), authorised and regulated by the Capital Market Authority (CMA), License No. 18-192-30. Registered under the laws of KSA. Registered office: 29th floor, Olaya Towers – Tower B, 3074 Prince Mohammed bin Abdulaziz St., Olaya District, Riyadh 12213 – 8022, KSA, Tel: +966 11 838 3600. The information contained within is intended strictly for Sophisticated Investors as defined in the CMA Implementing Regulations. Neither the CMA or any other authority or regulator located in KSA has approved this information. In the United Arab Emirates this material is only intended for -natural Qualified Investor as defined by the Securities and Commodities Authority (SCA) Chairman Decision No. 3/R.M. of 2017 concerning Promoting and Introducing Regulations. Neither the DFSA or any other authority or regulator located in the GCC or MENA region has approved this information. In the State of Kuwait, those who meet the description of a Professional Client as defined under the Kuwait Capital Markets Law and its Executive Bylaws. In the Sultanate of Oman, to sophisticated institutions who have experience in investing in local and international securities, are financially solvent and have knowledge of the risks associated with investing in securities. In Qatar, for distribution with pre-selected institutional investors or high net worth investors. In the Kingdom of Bahrain, to Central Bank of Bahrain (CBB) Category 1 or Category 2 licensed investment firms, CBB licensed banks or those who would meet the description of an Expert Investor or Accredited Investors as defined in the CBB Rulebook. The information contained in this document, does not constitute and should not be construed as an offer of, invitation, inducement or proposal to make an offer for, recommendation to apply for or an opinion or guidance on a financial product, service and/or strategy. In Singapore, this is issued by BlackRock (Singapore) Limited (Co. registration no. 200010143N). This advertisement or publication has not been reviewed by the Monetary Authority of Singapore. In Hong Kong, this material is issued by BlackRock Asset Management North Asia Limited and has not been reviewed by the Securities and Futures Commission of Hong Kong. In South Korea, this material is for distribution to the Qualified Professional Investors (as defined in the Financial Investment Services and Capital Market Act and its sub-regulations). In Taiwan, independently operated by BlackRock Investment Management (Taiwan) Limited. Address: 28F., No. 100, Songren Rd., Xinyi Dist., Taipei City 110, Taiwan. Tel: (02)23261600. In Japan, this is issued by BlackRock Japan. Co., Ltd. (Financial Instruments Business Operator: The Kanto Regional Financial Bureau. License No375, Association Memberships: Japan Investment Advisers Association, the Investment Trusts Association, Japan, Japan Securities Dealers Association, Type II Financial Instruments Firms Association.) For Professional Investors only (Professional Investor is defined in Financial Instruments and Exchange Act). In Australia, issued by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975 AFSL 230 523 (BIMAL). The material provides general information only and does not take into account your individual objectives, financial situation, needs or circumstances. In New Zealand, issued by BlackRock Investment Management (Australia) Limited ABN 13 006 165 975, AFSL 230 523 (BIMAL) for the exclusive use of the recipient, who warrants by receipt of this material that they are a wholesale client as defined under the New Zealand Financial Advisers Act 2008. In China, this material may not be distributed to individuals resident in the People’s Republic of China (“PRC”, for such purposes, excluding Hong Kong, Macau and Taiwan) or entities registered in the PRC unless such parties have received all the required PRC government approvals to participate in any investment or receive any investment advisory or investment management services. For Other APAC Countries, this material is issued for Institutional Investors only (or professional/sophisticated /qualified investors, as such term may apply in local jurisdictions). In Latin America, no securities regulator within Latin America has confirmed the accuracy of any information contained herein. The provision of investment management and investment advisory services is a regulated activity in Mexico thus is subject to strict rules. For more information on the Investment Advisory Services offered by BlackRock Mexico please refer to the Investment Services Guide available at www.blackrock.com/mx
Not FDIC Insured | May Lose Value | No Bank Guarantee
©2023 BlackRock, Inc. All Rights Reserved. BLACKROCK is a trademark of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.
BIIM1123U/M-3241160
Weekly Investment Commentary: Munis offer yield relief from inflation’s heat
U.S. yields began the year at their highest starting level since 2011, and they have since risen further across the Treasury and municipal curves.
Global Weekly Commentary: Higher bar for U.S. earnings to deliver
We saw 2024 as a year of two stories. First, cooling inflation and solid corporate earnings would support upbeat risk appetite.
Global Markets Weekly Update: April 19, 2024
Review the performance of global stock and bond markets over the past week, along with relevant insights from T. Rowe Price economists and investment professionals.