Market attention is currently focused on economic growth and monetary policy development. Market sentiment is generally positive, with gains recorded on both the equity and fixed-income markets during the year.
Strong market sentiment has continued in recent weeks, and in September, particularly positive momentum has been observed in emerging stock markets. This has primarily been influenced by the Chinese stock market, which represents a significant portion of the weight of emerging markets. In China, the AI theme and technology companies were going strong. In recent years, China’s performance has been somewhat weak, and many international investors, especially on the institutional side, have even avoided the country’s stock market. South Korea is another emerging market that has stood out and positively influenced the development of the entire market area.
Stock markets have also performed strongly elsewhere in the world, with the USA leading the way, driven by the technology sector. During the past year, the sharp depreciation of the US dollar has significantly eroded euro investors’ dollar-denominated returns. Over the summer, however, the decline stopped, and euro investors have also entered positive territory in their dollar-denominated investments.
Trade policy was the dominant theme in economic discussions in the spring, but now it has largely moved into the background, as tariffs have not dramatically shaken the markets anywhere in the world recently. Occasionally, trade policy still comes up in discussions, as it did last week when the USA announced new tariffs, including those related to pharmaceuticals.
The more acute assessments and concerns about a US recession have dissipated as trade policy risks have diminished. In the USA, growth has continued, driven particularly by investments in AI, while in Europe, acceleration is yet to come.
In the USA, there are currently both positive and negative scenarios available in the markets regarding economic growth. In a positive scenario, easing monetary policy, fiscal policy and globally accelerating industrial growth could create a temporary growth spurt.
The negative scenario, on the other hand, is related to the weakening of private consumption in the USA, for which preliminary indications have also emerged. Domestic consumption accounts for a large part of the USA’s economic growth. When examining the components of economic growth in the USA, private consumption has been by far the largest single contributor to economic growth throughout the 2000s.
Over the past year, the share of private consumption has significantly shrunk, but investments made particularly around the theme of AI have filled the gap left by domestic consumption. In the long term, however, investments cannot compensate for lower domestic consumption. If private consumption were to weaken further, for instance, due to a deteriorating labour market, it would also negatively affect global economic growth.
The US central bank, the Fed, began its anticipated interest rate cuts in September, and the markets expect it to make further rate cuts by the end of the year. At the moment, however, the Fed is between a rock and a hard place. The country’s core inflation is still around three per cent, and high inflation is currently posing challenges for ordinary consumers. At the same time, however, the labour market is slowing down and the unemployment rate has climbed – so far slowly but inevitably over the past year. Currently, there are more unemployed job seekers than open positions for the first time in a long time. If inflation remains high and the depreciation of the labour market does not ease, the Fed may find itself in a challenging situation.
Adding its own influence to US monetary policy is the current administration, which seemingly has a strong interest in pushing for lower interest rates. According to the general market view, political pressure on monetary policy has increased, and changes in central bank decision-makers may shift the direction of monetary policy. For example, the term of the current Fed Chair, Jerome Powell, will end at the latest next spring. Thereafter, President Donald Trump will appoint a new Fed Chair, whom the markets expect to pursue a monetary policy of lower interest rates.
Currently, two more interest rate cuts are expected from the Fed by the end of the year. The upcoming meetings and messages from the Fed are important, and the potential effects of politics on its decisions cannot be overlooked. Although the roadmap for future monetary policy seems to be clearly heading towards easing, it is still uncertain how it will ultimately turn out.
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