Growth is cruising at above-trend rates across the world. We see inflation picking up in
the U.S. but moving sideways at low levels in the eurozone, supporting monetary policy
divergence. Remarkably steady growth is fostering subdued market volatility. We see
this providing fertile ground for risk-taking in equities and emerging market (EM) assets.
• Inflation is key to the policy and market outlook. Our new BlackRock Inflation GPS suggests U.S. core
inflation will rise back toward 2%, giving the Federal Reserve comfort in pushing ahead with policy
normalization. In the eurozone, the lagging recovery means there is plenty of slack left in the economy.
The European Central Bank (ECB) may prolong its ultra-easy policies longer than markets expect.
• We see upbeat economic growth pushing bond yields up after a dip caused by a soft inflation patch,
geopolitical unease and a downshift in Fed rate increase expectations. Yet we see any yield rises
capped by structural factors such as graying populations, excess savings and tepid productivity growth.
U.S. policy normalization and potential for upside economic surprises support the U.S. dollar, in our view.
• What are the risks? Policy missteps or miscommunications cannot be ruled out as the Fed and some
other central banks reduce accommodation. China’s economy could slow if the country re-emphasizes
reforms over short-term growth after a crucial party congress. Geopolitical risks also lurk. But we see
few triggers that could shock markets out of their low-volatility regime reinforced by steady growth.
• Structurally lower yields underpin our positive view on equities and other risk assets. We are bullish on
EM: Valuations are attractive, investors are returning and EM stocks are increasingly tilted toward highgrowth
companies.We like European and Japanese stocks and prefer equities overall to credit, wheremuch good news appears priced in. We like the momentum and value equity style factors.