![](/sites/default/files/styles/1086x410/public/BLK-weekly.jpg?itok=jhUKjeh4)
Global Weekly Commentary: The new nominal takes shape
Key points
Waking up to inflation
Markets are waking up to inflation. This echoes our new nominal theme, which points to real yields staying deeply negative – a positive for risk assets.
Market backdrop
U.S. stocks hit record highs as President Joe Biden took office. Italy averted further political chaos as the government won a confidence vote in parliament.
Gauging the pent-up demand
Markets will monitor U.S. consumer spending data this week to gauge the size of the pent-up demand that would be key to the speed of activity restart.
We have long flagged the potential for higher inflation in the medium term, and markets have awoken to this prospect amid expectations for large U.S. fiscal stimulus. We don’t see this derailing the risk asset rally in the near term. We expect a muted response of nominal yields to inflation – our new nominal theme. This keeps us pro-risk, even as the road ahead could be bumpy due to virus dynamics.
Chart of the week
U.S. 10-year Treasury yield breakdown, 2019-2021
Sources: BlackRock Investment Institute with data from Refinitiv, January 2021. Notes: Nominal yield is represented by the Refinitiv U.S. Benchmark 10-year Government Bond Index. Real yield is represented by the yield of the Refinitiv U.S. 10-year TIPS Inflation-linked Government Bond Index. Inflation expectation is calculated by subtracting real yield from nominal yield.
The policy revolution that started in early 2020 to cushion the blow of the Covid shock is a major driver behind the new nominal, one of our three investment themes for 2021. A key consequence is the potential for a more muted response of nominal yields to higher inflation, in our view. Pricing of inflation expectations has risen to its highest level since October 2018 – helping drive nominal 10-year Treasury yields to the highest levels since last March. Yet “real” yields, or inflation-adjusted yields, have largely held steady. See the green line in the chart above. We had expected a united Democratic government to potentially accelerate the new nominal, as significant fiscal support could bolster the economic restart. Recent market moves are consistent with that view. We see room for nominal yields to rise as inflation grinds higher, yet expect the Federal Reserve to lean against any sharp rises. As a result, we could see range-bound nominal yields in the near term, and real yields remaining deeply negative.
A key part of the policy revolution is the evolving policy framework of major central banks. The Federal Reserve has led the way by signaling a willingness to allow inflation overshoots to make up for past misses – while vowing to keep interest rates low for the foreseeable future. The Fed’s policy meeting this week will likely echo this view, while noting the weakening of economic conditions since the last meeting in December. Already, recent moves in yields suggest markets will likely test the Fed’s resolve to curb any excessive climb in nominal yields. This is part of the reason why we don’t see the rise in nominal yields as a straight line. One potential side effect of the huge surge in debt levels caused by the policy revolution: over time, raising interest rates could become more politically fraught for central banks, and the risk of “taper tantrum” type events could complicate any attempts to normalize policy.
We see U.S. consumer price inflation in a range of 2.5%-3% over the next five years – still much higher than current market pricing. We see inflation triggered by two forces: higher production costs amid the remapping of global supply chains and new central bank frameworks that allow for inflation overshoots. Higher inflation and a limited rise in nominal yields should keep real yields negative, supporting risk assets. In this environment, the U.S. dollar could come under pressure as investors will likely seek higher-yielding assets outside of the U.S. We believe a stable or weaker dollar over the next 12 months supports emerging market assets.
The bottom line: We still expect the cumulative impact on economic activity from the Covid shock – what ultimately matters for asset prices – to be just fraction of that seen after the global financial crisis. This is despite a delay in the restart caused by a slow start of the vaccine rollout and the spread of more transmissible virus strains. We see stronger growth, higher inflation and low real yields ahead, as the vaccine-led restart eventually accelerates and central banks limit the rise of nominal yields. On the tactical horizon we are pro-risk overall, favoring equities and credit. Yet it is likely to be a bumpy road ahead for risk assets, in our view, as markets have made significant moves since late last year. On a longer-term, strategic horizon, we are neutral on equities given increased valuations. We also have a strategic underweight in nominal government bonds as we see their role in portfolios challenged by low yields and rising inflation.
© 2021 BlackRock, Inc. 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 Jan. 25, 2021, and are subject to change without notice. Reliance upon information in this material is at the sole discretion of the reader. Investing involves risks. Asset allocation and diversification does not guarantee investment returns and does not eliminate the risk of loss.
In the U.S. and Canada, this material is intended for public distribution. In EMEA Until 31 December 2020, 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. 2020394, has issued this document for access by Professional Clients only and no other person should rely upon the information contained within it. 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. From 31 December 2020, in the event the United Kingdom and the European Union do not enter into an arrangement which permits United Kingdom firms to offer and provide financial services into the European Union, the issuer of this material is:(i) BlackRock Investment Management (UK) Limited for all outside of the European Union; and(ii) BlackRock (Netherlands) B.V. for in the European Union, 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 Switzerland, this document is marketing material. 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, as amended. 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. In the Kingdom of Saudi Arabia this information is only directed to Exempt Persons, Authorized Persons or Investment Institutions, as defined in the relevant implementing regulations issued by the Capital Markets Authority (CMA). 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 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, for institutional investors and financial intermediaries only (not for public distribution). 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
© 2021 BlackRock, Inc. All Rights Reserved. BLACKROCK, iSHARES and ALADDIN are trademarks of BlackRock, Inc. or its subsidiaries in the United States and elsewhere. All other trademarks are those of their respective owners.
BIIM0121U/M-1492713