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Slightly Bullish +25

Global Weekly Commentary - Insights - blackrock.com

AI-generated analysis

🎥 BlackRock's Senior Economist Nicholas Fawcett argues that persistent inflation pressures keep interest rates higher for longer than previously anticipated.

⚠️ The Middle East conflict has added to inflationary risks, challenging the view that long-term government bonds are reliable diversifiers against equity declines.

📉 Core services inflation remains stubbornly high due to an aging population, immigration curbs, AI capex booms, and tariff-driven goods inflation.

🏦 Central banks face a trade-off between reining in inflation or supporting economic growth and jobs as they meet this week.

📈 The S&P 500 reached a record high despite rising oil prices from Middle East disruptions, reflecting waning skepticism on AI's payoff.

🇪🇺 Europe and parts of Asia are feeling the brunt of supply-driven inflation due to dependence on imported energy, while the US is more shielded as a net exporter.

⚡ Government investment in energy security and defense is adding upward pressure on inflation amidst rising debt loads globally.

🤖 An accelerating AI buildout is increasing demand for energy, data centers, and specialized labor, bumping into worsening capacity constraints.

💊 Prices of key AI inputs like semiconductors are rising as supply lags demand, though productivity gains may eventually offset "chipflation".

🏛️ The Fed and other central banks are expected to leave policy rates unchanged this week as they assess the inflation/growth trade-off.

🌍 Markets have flipped to pricing out US rate cuts and now expect the European Central Bank to hike interest rates this year.

📊 Annual core services inflation data through April 2026 shows a trend persisting above pre-pandemic levels across major economies.

💹 BlackRock remains risk-on, staying overweight on US and emerging market equities due to rapid AI buildout opportunities.

🚫 The "diversification mirage" of government bonds is highlighted as a core feature of the post-pandemic world environment.

⚙️ Supply disruptions from the Middle East conflict have intensified structural drivers including geopolitical fragmentation and energy transition demands.

Bullish Signals
  • BlackRock Investment Institute maintains an overweight position on US and Emerging Market equities due to the rapid AI buildout.
  • The S&P 500 reached a new record high even as oil prices rose amidst Middle East disruptions, indicating growing skepticism over AI buildout payoff concerns is fading.
  • US inflation dynamics are more favorable compared to Europe and Asia because the US is a net energy exporter, shielding it from import-dependent inflation pressures.
  • AI productivity gains are expected to quickly offset rising costs for key inputs like semiconductors and help push down inflation over time.
  • Investments in energy security and defense by governments globally are creating thematic opportunities linked to AI and supply chain resilience.
  • Markets are now pricing out US rate cuts while expecting the European Central Bank to raise rates, signaling confidence in stronger US economic conditions relative to Europe.
Risk Factors
  • The Middle East conflict has intensified supply constraints on energy and industrial materials, leading to significant inflationary pressures that persist beyond the initial shock.
  • Long-term government bonds are no longer effective diversifiers against equity market declines due to these sustained inflationary pressures.
  • Markets have completely priced out US rate cuts for this year, with investors now expecting the European Central Bank to raise interest rates instead of maintaining current levels.
  • Core services inflation remains stubbornly high due to structural factors like an aging population, immigration curbs creating a tight labor market, and AI-led capital expenditure booms.
  • Prices of key AI inputs such as semiconductors are rising significantly as production capacity struggles to keep pace with the rapid buildout demand.
  • The global backdrop is described as being 'shaped by supply,' where supply constraints serve as the main drivers of inflation, creating a difficult policy trade-off for central banks.
  • European markets and parts of Asia are feeling the brunt of Middle East conflicts due to their dependence on imported energy, while rising government spending on defense and energy security adds to towering debt loads.
  • The Federal Reserve and other central banks face a stark trade-off between trying to reining in inflation or supporting economic growth and jobs as they consider policy decisions this week.
Full Analysis
BlackRock Investment Institute Senior Economist Nicholas Fawcett warns that markets are underestimating persistent inflationary pressures stemming from both pre-existing structural factors and the ongoing Middle East conflict. Prior to the geopolitical turmoil, markets had already priced out US rate cuts due to stubborn core services inflation driven by a tight labor market resulting from an aging population and immigration curbs. Now, combined with AI-led capital expenditure booms, tariff-driven goods inflation, and rising energy costs from supply disruptions in the Middle East, inflation remains above central bank targets. Consequently, Fawcett asserts that higher yields are here to stay and that long-term government bonds have ceased to function as effective diversifiers against equity market declines, creating what he terms a "diversification mirage." Inflation dynamics described in the report highlight a world increasingly shaped by supply constraints rather than demand shocks alone. Key drivers include governments rushing to invest in energy security and defense amidst geopolitical fragmentation, which increases debt loads and pushes inflation higher globally. Meanwhile, the accelerating AI buildout is creating massive demand for energy, data centers, and specialized labor, while capacity lags for critical inputs like semiconductors drive up costs. Europe and parts of Asia face greater exposure to these supply shocks due to their dependence on imported energy compared to the US, which remains a net energy exporter, though Fawcett notes that productivity gains from AI could eventually offset "chipflation" and other price pressures if they materialize soon enough. Ahead of this week's Federal Reserve and European Central Bank meetings, BlackRock expects central banks to leave policy rates unchanged as they navigate a difficult trade-off between reining in inflation and supporting economic growth and employment. The S&P 500 has recently crawled to record levels despite rising oil prices, reflecting a market view that skepticism around the AI buildout's immediate payoff is dissipating. BlackRock maintains an overweight position on US and emerging market equities, citing the rapid AI buildout as a source of thematic opportunity, while emphasizing that current conditions make interest rates higher for longer than previously anticipated by markets.