MARKET INSIGHTS

Weekly market commentary

Apr 21, 2025 | Blackrock Investment Institute
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When economic rules start to bind

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Market take

Weekly video_20250421

Glenn Purves

Global Head of Macro, BlackRock Investment Institute

Opening frame: What’s driving markets? Market take

Camera frame

We have argued for a few years that mega forces are transforming the world. Two have collided recently: geopolitical fragmentation and the future of finance.

Title slide: Big questions about global markets

This transformation is raising big questions about global markets.

1: Bond yields: A big question

Where will long-term U.S. bond yields settle? We argued in 2021, that the combination of higher inflation, higher interest rates and large U.S. debt creates a “fragile equilibrium,” one vulnerable to investor confidence.

The recent unusual surge in Treasury yields as U.S. stocks and the dollar fell has brought that fragile equilibrium into sharp focus.

It is almost impossible to predict the end state of a transformation. Unpredictable trade talks make it even harder.

2: Economic laws limit possibilities

 Yet, immutable economic laws limit the possible outcomes. One such law? The current account deficit can’t be reduced without the same fall in foreign financing. So, reducing the trade deficit could hurt the U.S.’s ability to finance its debt, especially if it dents the confidence of foreign investors. They currently hold about a third of U.S. debt. That risks higher bond yields.

Another law? Global supply chains cannot be rewired quickly without disruption. We expect supply shocks to slow growth and push up inflation – just like in the pandemic. That limits what central banks can do to support growth.

3: Economic laws governing U.S. policy

We have already seen these two laws spurring U.S. policy adjustments. The recent Treasury selloff was swiftly followed by a 90-day pause on most tariffs, while supply chain worries seemed to prompt quick exemptions for electronics.

Outro: Here’s our Market take

In a world where many outcomes are feasible, we remain nimble and track the economic laws that will govern the U.S. policy mix. We focus on themes more than asset classes. For now, we see the AI mega force driving returns, mostly in the U.S. We find selective opportunities in Europe and stay underweight long-term Treasuries.

Closing frame: Read details: blackrock.com/weekly-commentary

Binding economic rules

U.S. policy shifts are adding to the global transformation already underway. We track rules that will shape policy and focus on themes – like AI – driving returns.

Market backdrop

U.S. stocks steadied last week but are still down 6% since the April 2 tariff announcement. U.S. 10-year yields are up since then to near 4.35%.

Week ahead

Global flash PMIs will be the main focus this week to see how U.S. tariffs and policy uncertainty are impacting incoming orders and the outlook for activity.

We have argued for a few years that mega forces, like geopolitical fragmentation, are transforming the world. U.S. trade policy is adding to this transformation. This isn’t a business cycle, but a long-term structural shift. It raises big questions about the trajectory for global markets, making long-term expectations more sensitive to short-term news. We focus on themes that can drive returns over broad asset classes. We see the AI mega force driving returns over time, mostly in the U.S.

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Term premium returns
U.S. 10-year yield breakdown, 2010-2025

The chart shows the recent uptick in the New York Fed’s estimate of the 10-year term premium – the extra compensation investors demand for the risk of holding long-term bonds – along with the risk-neutral yield and the combined total yield.

Source: BlackRock Investment Institute and New York Federal Reserve, with data from LSEG Datastream, April 2025. Note: The chart shows the New York Fed’s estimate of the 10-year term premium – the extra compensation investors demand for the risk of holding long-term bonds – along with the risk-neutral yield. Both make up the total yield.

How will the role of U.S. Treasuries in portfolios evolve? It’s one of the big questions raised by the recent collision of two mega forces: geopolitical fragmentation and the future of finance. We argued in 2021 that higher inflation and interest rates at a time of elevated debt create a “fragile equilibrium” for U.S. bonds, one vulnerable to shifts in investor confidence. We have long expected structurally higher interest rates. The recent unusual surge in Treasury yields as U.S. stocks and the dollar slid suggests a desire for more compensation for risk and brought that fragile equilibrium into sharp focus. See the chart. Predicting the end state of a transformation is near impossible, compounded now by unpredictable trade talks. Yet the policy-setting process will bump up against economic rules that put bounds on the realms of what’s possible. We track those rules, not each policy twist.

The U.S. runs large fiscal deficits and high debt, about 30% of which is held by foreign investors, Fed data show. An economic rule in play here? The current account deficit cannot be reduced without a corresponding fall in foreign financing. By pushing to reduce the trade deficit quickly, the U.S. will find it harder to finance its debt, especially if unpredictable tariff negotiations dent the confidence of foreign investors. That points to higher bond yields and debt servicing costs, upending budgetary arithmetic. Another rule? Global supply chains can evolve over time but cannot be rewired at speed without major disruption. Tariffs not only raise costs but can cut access to key inputs and potentially halt production. That risks a growth slowdown or recession with high inflation, just like in the pandemic. That limits any central bank response. In seeking to slash trade deficits fast, the U.S. will bump up against these economic rules. That seems to have already happened with the recent rapid Treasury selloff and tariff exemptions for electronics to avoid the most obvious supply chain disruptions.

Economic rules in play

We see U.S. policy shifts adding to the structural transformation already underway. That transformation could have any number of outcomes in coming years. We can no longer extrapolate from past trends or rely on long-term assumptions to anchor portfolios. The distinction between tactical and strategic asset allocation is blurred. Instead, we need to constantly reassess the long-term trajectory and be dynamic with asset allocation as we learn more about the future state of the global system. Uncertainty about that future landscape can also incentivize non-U.S. investors to keep more money in local markets.

The binding effect of these economic rules on trade negotiations mean it will take time to uproot the current system. In the near term, today’s financial order remains the starting point. We focus on themes powering the global transformation. We still see the AI mega force driving returns, especially in the U.S. We find selective opportunities in Europe, for example in banks and defense. We prefer European credit and government bonds to the U.S. How the bloc responds to shifting global dynamics and tackles its structural challenges will be key.

Our bottom line

Many different outcomes are feasible, so we navigate near-term uncertainty by tracking economic rules that will shape trade policy. We like U.S. stocks as a route to invest in AI and stay selective in Europe. We underweight U.S. Treasuries.

Market backdrop

U.S. stocks steadied after the historically big volatility since the April 2 announcement on U.S. tariffs. The S&P 500 was flat for the week and still down about 6% since then. Nvidia came under pressure after the U.S. announced export controls on one of the main chips it sells to China. U.S. Treasury yields fell on the week but are still up 14 basis points to 4.34% since April 2, highlighting their reduced ballast role in portfolios. The U.S. dollar held near a three-year low against major currencies.

Global flash PMIs for both manufacturing and services activity will be in focus this week as investors look for any signs of the U.S. tariffs, policy uncertainty and risk asset selloff having an impact. The University of Michigan’s consumer sentiment survey will also be closely watched, especially given the surge in expected inflation among households as tariffs kick in. So far, higher household inflation expectations have not fed into market pricing of future inflation.

Week ahead

The chart shows that gold is the best performing asset year to date among a selected group of assets, while U.S. equities are 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 April 16, 2025. 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.

April 22

Euro area consumer confidence

April 23

Global flash PMIs

April 25

UK retail sales; University of Michigan consumer sentiment

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Meet the authors
Jean Boivin
Jean Boivin
Head – BlackRock Investment Institute
Wei Li
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Glenn Purves
Glenn Purves
Global Head of Macro – BlackRock Investment Institute
Christian Olinger
Christian Olinger
Portfolio Strategist – BlackRock Investment Institute