Monthly Market Views: Fed eyes new leadership as shares and JGB yields rise

• Market concerns
• Equities weather the geopolitical storm
• Fed succession

Market concerns hit Japanese government bond yields

Japanese government bond yields have been on the rise, with 10-year issues hitting 2.35% on 20 January. There are numerous causes driving the bond sell-off. First, the Bank of Japan has increased its overnight interest rate from -0.1% in early 2024 to 0.75% and futures markets suggest this will extend to 1.2% by the end of 2026. Some economic forecasts suggest interest rates could even rise to 2.0%. Second, there are concerns over government debt levels and the potential for renewed fiscal stimulus following 8 February’s snap general election. Should Prime Minister, Sanae Takaichi, strengthen her mandate, then tax cuts and increases in defence spending are expected to follow.

In addition, Japan’s economy has been growing quickly, with nominal GDP growth close to 4.5% in 2025 and there are concerns about structurally lower demand for long-term JGBs. The market is likely to remain sensitive to policy developments. However, 2026 should see lower inflation (consensus forecast of around 2.0%) which could help stabilise yields. In the meantime, potential repatriation flows into the yen market might contribute to higher global bond yields and currency volatility. In short, Japanese yields are in a new medium-term equilibrium range between 2% and 3%.

Equities weather the geopolitical storm

The dollar and gold price might tell a different story, but equity markets have shrugged off the geopolitical turmoil we have seen over the last month. This is partly because the impact on economic growth and corporate profits of Venezuela and Greenland is less clear than it was for Liberation Day last April. In addition, recent economic data has generally been positive and better than expected. The key determinant for the direction of equity markets in the near term will be the results of the current earnings season.

At the time of writing, around 143 companies had reported, and the figures are encouraging: aggregate earnings growth of 11% and absolute earnings more than 10% above expectations, according to FactSet. Last year’s technology sector outperformance, however, has not been repeated so far this year, or at least not entirely: the Nasdaq 100 has just barely outperformed the MSCI Europe index after initially lagging. In emerging markets, though, artificial intelligence remains the key driver, with technology stocks in the region advancing by nearly 12% in the year to date. We expect that pace of appreciation to slow, while US technology stocks pick up speed.

Fed succession: This time it’s different

After January’s gathering of the rate-setting Federal Open Market Committee, Jerome Powell, Chair of the US Federal Reserve, will lead only two more meetings – one in March and one in April – before his terms ends in May. President Donald Trump has nominated Kevin Warsh as Powell’s replacement. The succession at the head of the Fed has always attracted the attention of economists, but this time it’s different. Statements on monetary policy by the president and the Treasury Secretary Scott Bessent have raised concerns among investors over the Fed’s independence being impeded.

Why does this matter? Many central banks are accountable for their actions to the respective Parliament (or Congress, in the case of the US). Is this preferable to answering to politicians? The answer is ‘yes’. A recent ECB study of 155 central banks over 50 years concluded that “independent central banks are able to pursue more credible monetary policies and are therefore more effective at keeping inflation under control.”¹ In other words, independence allows central banks to move away from short-term (political) objectives and focus on their core mandate. A loss of credibility could de-anchor the inflation expectations of businesses, investors and consumers. That could result in a rise in long-term bond yields, which could harm financial markets (including equities) and the broader economy. Monetary policy is not only about setting interest rates.

Asset Class Summary Views

Views expressed reflect CIO team expectations on asset class returns and risks. Traffic lights indicate expected return over a three-to-six-month period relative to long-term observed trends.

CIO team opinions draw on AXA IM investment team views and are not intended as asset allocation advice.