In the USA, the economy continues to grow and inflation is not coming down, which also gives the Fed less room to lower its interest rates. The European Central Bank, in contrast, is expected to briskly lower its interest rates next year, too.
The economic growth outlook for Europe and the USA has diverged. The US economy has continued its robust development, and inflation shows no major signs of weakening. The growth outlook for Europe has been more muted than the USA’s for some time now.
Currently, the struggling industrials sector in particular is causing a headache for Europe’s economic growth. One example of this is the automotive industry’s difficulties, which are having broader repercussions via subcontractors. In addition, China’s economic growth has been weaker, which also reduces demand for investment commodities from Europe. Now, with inauguration day around the corner in January, we also await president-elect Donald Trump’s threatened tariffs, which could further weaken the situation in Europe.
In Europe, the markets are also worried about political uncertainty. France’s government collapsed last week, and German Chancellor Olaf Scholz’s government is plagued by internal conflicts.
Recently, the stock markets have been strongly divided across geographical areas, and they can hardly be referred to as a unified whole.
The US stock market has been a major success, and positive development has also been seen in Japan lately. Things have been more inconsistent elsewhere, and particularly in Europe and the emerging markets the situation has been sluggish.
Right now, pricing on the US stock market appears challenging. Behind the strong stock market is the increase in the valuation level of tech companies, which is considerably propping up the country’s entire stock market. The rise in stock prices is not due solely to earnings growth, although earnings have improved.
At the same time, the dollar has appreciated clearly against the euro and other key currency pairs. Factors influencing this are strong underlying expectations on the markets that Trump’s policies could accelerate inflation.
This was also reflected in the fixed income markets. In the USA, interest rates have remained high, while in Europe they are falling.
Besides economic growth, the USA’s and Europe’s roads are also diverging in terms of their key interest rate trend. The ECB will hold its next meeting on Thursday, 12 December. The markets have priced in another quarter-point rate cut by the ECB as a near certainty. Inflation in the eurozone has fallen close to the ECB’s target and the growth outlook has weakened, which gives the central bank opportunities to ease its monetary policy.
The Fed’s meeting will take place on Wednesday 18 December. The markets consider an interest rate cut likely but not certain. The USA’s strong economic growth coupled with the Trump administration’s anticipated agenda increases inflationary pressures and reduces the Fed’s opportunities to cut interest rates.
A brisk pace of interest rate cuts is priced in for the ECB next year as well. The markets are currently pricing in an interest rate cut of six quarter points, i.e. 1.5 percentage points, for the ECB by next September. In the USA, however, the markets are expecting a more moderate pricing path from the Fed. Two or three interest rate cuts are currently priced in for the Fed by September.
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