So far, this year has more or less matched expectations, despite a few frights. Global economic growth has held up and it is unlikely that it is heading toward recession.
Slow economic growth continued in China and Europe. Thanks to falling inflation, monetary policy has been eased in the US and the euro area. Yield curves have become steeper, as expected. Corporate bonds have delivered excellent returns. Corporate earnings growth continued, with tech companies still the driving force. Geopolitical risks were not reflected in the capital markets. The weakening of the dollar was the biggest surprise. After all, its exchange rate was at its peak at the turn of last year.
Nevertheless, it looks as if the US economy will continue to outperform. Globally, the business environment is very challenging, but the equity markets seem poised to surmount the wall of worry.
Concerns
Political pressure on the Fed intensified when President Donald Trump attempted to remove board member Lisa Cook. The Fed decided to keep interest rates unchanged at its August meeting. US jobs performance in August was disappointing, but an economic downturn is not expected. Erika McEntarfer, the Commissioner of the Bureau of Labor Statistics, was fired because of the “wrong” numbers.
Fed Chair Jerome Powell signaled that a cut in the federal funds rate may be possible in September. The Fed seems willing to ignore the price spikes caused by tariffs as temporary, and eager to focus on weakening growth and cooling job markets. Fixed income markets are pricing in two rate cuts this year.
Tariffs continued to be fine-tuned between the US and various countries. However, their market impact is fading. In addition, a federal court of appeals ruled that the IEEPA duties imposed by the President are illegal. The administration plans to appeal the decision to the Supreme Court. Its decision is expected in spring 2026. The tariffs will remain in place until then, and the market reaction was muted.
The meeting between President Trump and President Putin fell short of expectations. Efforts to end the war in Ukraine have stalled, despite the imposed deadlines.
Risk appetite on the market
The equity and corporate bond markets performed well in August. The equity markets in Asia were up 3–5% across the board and the S&P 500 index up 2.2% in the US, but Europe's gains were more modest. The euro did strengthen by a couple of percent, however. The US equity markets continued to be driven by large tech companies, whose earnings performances have continued to be strong. In the second quarter, US earnings grew by 9.9% and European earnings by around 4%.
Risk premiums on emerging market bonds continued to fall, reaching their lowest levels since 2008. Risk premiums on European high yield bonds also fell, falling close to the 2018 lows. The US long rate fell slightly. A small increase was seen in European long-term interest rates. France’s 10-year interest rate rose as the country plunged into a government crisis. Expectations of an interest rate cut by the European Central Bank are currently low.
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