The bigger story was the Bank of Japan's historic decision to end its yield curve control policy. Despite the media coverage, this was widely expected and Japanese government bond markets only saw modest moves, with the yen appreciating about 1%. Japanese equities reacted very positively though, rising another 5% for the week and bringing year-to-date gains to 20%.

Other global equity markets also fared well, with Australia, emerging markets and the UK up several percent. In the U.S., the Federal Reserve kept interest rates on hold as expected, but struck a more dovish tone than anticipated given recent strong economic data and sticky inflation readings, especially in services. Fed Chair Powell expressed confidence that disinflation was proceeding according to plan, hinting that next week's PCE inflation data for February may come in lower. US markets passed at the end of the week after weak results form Nike and Lululemon suggested the US Consumer might be running out of steam.

Markets interpreted this to mean that interest rates are still likely headed lower and that a soft landing or even better outcome for the economy is achievable. This propelled gains in cyclical and risk assets, with U.S. small caps up 3%, the Nasdaq up 2%, and flat performance for emerging markets. Australian equities rose 1%, led by materials and banks.

Bond markets were relatively quiet, with U.S. 2-year yields gyrating a little during Fed Chair Powell's comments about financial conditions being tight (a view markets disagree with) but ending the week little changed. This suggests markets are still positioning for rate cuts and are encouraged by Powell's somewhat dovish rhetoric.

In terms of inflation expectations, U.S. 1-year breakevens have ticked up to 2.6%, at odds with Powell's disinflation view. Further out, 5-year expectations are 2.5%, implying markets believe the Fed will tolerate a 2-3% inflation range rather than strictly target 2%. Australian inflation expectations held steady around 3%.

From a strategy perspective, value managers have surged 10-15% year-to-date, with much of those gains coming in just the past week. Growth strategies are also up 15-20%, reflecting a broadening of market gains beyond just tech early in the year. Some individual growth funds are up as much as 25%.

Looking ahead, markets are on a knife's edge with the path dependent on incoming data, especially around fiscal spending impulse in the U.S. February's PCE inflation report next week will be key to either validating or refuting Powell's dovish stance. Overall, sentiment has improved but remains delicately balanced between disinflation/deflation or stickier inflation depending on government policies.