MARKET INSIGHTS

Weekly market commentary

Big policy shifts reinforce higher rates

­Market take

Weekly video_20250310

Glenn Purves

Global Head of Macro, BlackRock Investment Institute

Opening frame: What’s driving markets? Market take

Camera frame

Germany’s plans for a big fiscal boost and the U.S. tariffs reinforce our expectation that policy rates will stay higher for longer.

Title slide: Big policy shifts reinforce higher rates

1: Pain from policy uncertaintyPolicy uncertainty poses risks to near-term growth.

Yet persistent inflation could limit the Federal Reserve rate cuts that markets expect. That reinforces our expectation of higher-for-longer policy rates and bond yields.

2: Positive outlook for U.S. stocks Our expectation for resilient U.S. corporate profits is less certain for now.

We still think earnings strength can broaden out beyond tech and to other regions as the artificial intelligence theme evolves.

3: Downgrading euro area bonds

German bunds had their sharpest selloff since 1990 last week. That came after Germany and Europe took steps to ramp up defense and infrastructure spending

We go underweight in euro area sovereign bonds. We think yields can climb further due to higher-for-longer policy rates as greater government borrowing and spending stoke inflation.

Outro: Here’s our Market take

U.S. tariffs and Europe’s plans for a fiscal boost reinforce our expectation of higher-for-longer policy rates and higher bond yields.

We go underweight in euro area sovereign bonds.

Policy uncertainty could continue to weigh on U.S. stocks in the near term, but we see reasons to stay overweight tactically.

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

Higher-for-longer

U.S. tariffs and Europe boosting fiscal stimulus reinforce our view of policy rates staying higher versus pre-pandemic levels. We go underweight euro area bonds.

Market backdrop

U.S. stocks slid 3% last week on market concerns about policy uncertainty. German bond yields jumped the most since 1990 on big fiscal spending plans.

Week ahead

We think solid, if slowing, job growth and persistent wage pressures should show sticky core inflation in next week’s February U.S. CPI data.

Germany’s planned fiscal boost and the U.S. starting to levy hefty tariffs are major policy shifts. Policy uncertainty and bond yield spikes pose risks to growth and stocks near term. We see more upward pressure on European and U.S. yields from sticky inflation and rising debt levels, even as lower U.S. yields suggest markets expect a typical Federal Reserve response to a downturn. Yet we think mega forces like AI can offset these drags on stocks, keeping us positive over six to 12 months.

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Return of tariffs
U.S. effective tariff rate, actual and potential, 1900-2025

The chart shows our expectation for average effective tariff rate of about 10% in the U.S., up from around 3% in 2023.

Forward looking estimates may not come to pass. Source: BlackRock Investment Institute, U.S. Bureau of Economic Analysis, Historical Statistics of the United States, with data from Haver Analytics, March 2025. Note: The chart shows the effective rate of tariffs – total tariff revenue divided by total import value. The dot shows our estimate of where the effective tariff rate could ultimately end up.

The U.S. briefly rolled out the largest tariffs in nearly a century on March 4: 25% tariffs on most Canadian and Mexican imports and an extra 10% on China. While most North American tariffs were later put on ice for another month, we think an average effective tariff rate of about 10% could be the eventual landing zone – with volatility along the way. See the chart. What matters more for near-term growth: any pain due to elevated uncertainty, including a potential U.S. government shutdown. Markets expect weaker U.S. growth to push the Fed to cut policy rates as in a typical business cycle. Yet we see a tough trade-off between supporting growth and curbing sticky inflation, limiting how much the Fed can cut. That reinforces our expectation of rates above pre-pandemic levels and higher bond yields. Germany’s plans for big defense and infrastructure spending mark a major fiscal policy shift.

Our scenarios framework – mapping potential outcomes for different mixes of growth, inflation and policy responses – helps us navigate this evolving market and economic landscape. In the past few weeks, markets have been increasingly pricing in a potential recession. We disagree. Why? Job creation has slowed slightly but the labor market remains strong in contrast to soft survey data showing declining consumer confidence. U.S. corporate earnings are also holding up. We still think earnings strength can broaden out beyond tech and to other regions as the buildout and adoption of artificial intelligence progresses. While heightened policy uncertainty will drive near-term market volatility, these other drivers keep us overweight U.S. stocks.

Bond yields can climb

Long-term U.S. Treasuries have rallied as recession fears grip markets. Yet they don’t reliably buffer against equity selloffs given persistent inflation. And yields could spike suddenly. One reason: Higher-for-longer Fed policy rates and persistently large fiscal deficits – even with tariff revenue and spending cuts – could push investors to demand more compensation for the risk of holding long-term bonds. We stay underweight long-term Treasuries, preferring short-term notes for income.

This pressure on yields is global. German bunds suffered their sharpest selloff since 1990 after the parties set to lead Germany’s next government agreed to a €500 billion infrastructure fund and axed deficit limits on defense spending. These plans – to be voted in parliament next week – come as the U.S. says Europe is no longer a top security priority. The European Union also proposed amending its budget rules to up defense spending. Europe could face higher-for-longer rates like the U.S. as greater government borrowing and spending stoke inflation. Plus, the European Central Bank is nearing the end of rate cuts. That’s all why we think euro area sovereign bond yields can rise further and go underweight. We trim our underweight to Japanese government bonds: yields have surged to 16-year highs. Yet we still see room for JGB yields to keep rising in a world of elevated debt levels and higher inflation.

Our bottom line

U.S. tariffs and Europe’s plans for a fiscal boost reinforce our expectation of higher-for-longer interest rates and bond yields. We go underweight euro area bonds. Policy uncertainty could keep weighing on U.S. stocks near term.

Market backdrop

The S&P 500 slid 3% last week, its biggest weekly drop in six months and dragging the index into negative territory for the year. Ten-year U.S. Treasury yields were flat on the week but about 50 basis points below the year’s high, while 10-year German bund yields jumped about 45 basis points last week – the largest surge since German reunification in 1990. U.S. payrolls data showing slower but still solid job gains suggests market concerns about a recession are overdone, in our view.

We’re focusing on the U.S. CPI for February out this week. We expect inflation pressures to remain elevated given strong job growth and persistent wage pressures that suggest core inflation will stay above the Fed’s 2% policy target. Now U.S. tariffs could potentially boost inflation pressures depending on their scope and implementation. We think that makes the Fed unlikely to cut interest rates as much as markets are pricing in.

Week ahead

The chart shows that gold is the best performing asset year to date among a selected group of assets, while brent crude 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 6, 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.

March 10

Japan trade balance

March 12

U.S. CPI; Japan corporate goods

March 13

U.S. PPI

March 14

U.S. University of Michigan sentiment survey; UK GDP

Read our past weekly market commentaries here.

 

Big calls

Our highest conviction views on tactical (6-12 month) and strategic (long-term) horizons, March 2025

  Reasons
Tactical  
U.S. equities Policy uncertainty may weigh on growth and stocks in the near term. Yet we remain overweight as we see the AI buildout and adoption creating opportunities across sectors and driving equity strength over our tactical horizon. We tap into beneficiaries outside the tech sector. We see valuations for big tech backed by strong earnings, and less lofty valuations for other sectors.
Japanese equities A brighter outlook for Japan’s economy and corporate reforms are driving improved earnings and shareholder returns. Yet the potential drag on earnings from a stronger yen is a risk.
Selective in fixed income Persistent deficits and sticky inflation in the U.S. make us underweight long-term U.S. Treasuries. We also prefer European credit – both investment grade and high yield – over the U.S. on more attractive spreads.
Strategic  
Infrastructure equity and private credit We see opportunities in infrastructure equity due to attractive relative valuations and mega forces. We think private credit will earn lending share as banks retreat – and at attractive returns.
Fixed income granularity We prefer DM government bonds over investment grade credit given tight spreads. Within DM government bonds, we favor short- and medium-term maturities in the U.S., and UK gilts across maturities.
Equity granularity We favor emerging over developed markets yet get selective in both. EMs at the cross current of mega forces – like India and Saudi Arabia – offer opportunities. In DM, we like Japan as the return of inflation and corporate reforms brighten the outlook.

Note: Views are from a U.S. dollar perspective, March 2025. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.

Tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, March 2025

Legend Granular

Our approach is to first determine asset allocations based on our macro outlook – and what’s in the price. The table below reflects this. It leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns. The new regime is not conducive to static exposures to broad asset classes, in our view, but it is creating more space for alpha. For example, the alpha opportunity in highly efficient DM equities markets historically has been low. That’s no longer the case, we think, thanks to greater volatility, macro uncertainty and dispersion of returns. The new regime puts a premium on insights and skill, in our view.

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a U.S. dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.

Euro-denominated tactical granular views

Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, March 2025

Legend Granular

Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a euro perspective, March 2025. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.

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Meet the authors
Jean Boivin
Head – BlackRock Investment Institute
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Glenn Purves
Global Head of Macro – BlackRock Investment Institute
Tuan Huynh
Chief Investment Strategist for Germany, Austria, Switzerland and Eastern Europe – BlackRock Investment Institute