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Resetting Rate Expectations

Richard Turnill profile picture
Richard Turnill

Key points

  • Central banks are retreating from super accommodative policies. We prefer stocks over bonds amid moderately rising rates.
  • Markets priced in more gradual U.S. policy tightening after comments by the Federal Reserve chair and soft inflation data.
  • The European Central Bank meets this week. Markets are also looking ahead to President Mario Draghi's August speech.

Central banks increasingly are moving away from excessively easy monetary policy. Yields paused after recent gains last week, partly on soft inflation data. Yet we see them rising gradually, reinforcing the case for stocks over bonds.

Difference between five- and two-year government bond yields, 2017

Sources: BlackRock Investment Institute, with data from Thomson Reuters, July 2017.
Note: The lines show the difference between benchmark nominal five- and two-year government bond yields for each country in percentage points. European Central Bank comments refers to Mario Draghi's comments at the central bank's annual policy forum on June 27 in Portugal.

Monetary tightening expectations shifted upward globally in June after markets interpreted ECB remarks as hawkish. This was reflected in a sharp rise in the gap between five- and two-year yields - a key gauge of monetary policy expectations. Germany led the move higher, as seen in the chart above.

The beginning of the end of ultra-easy monetary policy

The major catalyst for the upward shift: ECB President Mario Draghi's June comments on the need to normalize policy. Draghi said "a constant policy stance will become more accommodative," as easy financial conditions accelerate economic activity. We see inflation in the eurozone eventually picking up amid ongoing monetary support, a sustained global economic expansion and an improving eurozone outlook. Accordingly, we see the ECB announcing in September that it will start scaling down its asset purchases beginning in 2018. We expect prudence and patience to guide the bank's process for withdrawing

This article was written by

Richard Turnill profile picture
Richard Turnill, Managing Director, is Global Chief Investment Strategist for BlackRock, leading the Investment Strategy Function within the BlackRock Investment Institute (BII). He is responsible for ensuring we create, coordinate and communicate value added market and investment insights and deliver them consistently to our clients and client facing professionals. Prior to his current role he was Chief Investment Strategist for the Alpha Strategies Group, responsible for developing strategic plans around the Alpha Strategies product range and the positioning of Alpha Strategies products both internally and externally. He has also served as Head of the Global Equity team within the Fundamental Active Equity division of BlackRock's Portfolio Management Group. He was responsible for leading the team which manages large cap global equity portfolios. Mr. Turnill's service with the firm dates back to 1996, including his years with Merrill Lynch Investment Managers (MLIM), which merged with BlackRock in 2006. At MLIM, he led the global equity team and was responsible for overseeing all aspects of the investment process. Earlier, Mr. Turnill was a group economist in MLIM's Central Strategy Group, head of MLIM's asset allocation and economics team, and was the Chief Investment Officer for the Merrill Lynch Global Private Client discretionary business in EMEA Pacific. Prior to joining MLIM in 1996, Mr. Turnill worked in the international division of the Bank of England as an economic advisor and the global economics team of Paribas Capital Markets in London. Mr. Turnill earned an MA degree in economics from Cambridge University in 1991.

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