Global markets enjoyed a lift this week as investors’ growing conviction that the Federal Reserve (Fed) will cut interest rates next week helped drive stock gains, while putting sustained pressure on the U.S. dollar.
Stocks on the Rise
• Global equity markets rose broadly, with investors betting that a rate cut from the Fed will shore up economic growth after weak U.S. labor data.
• In the U.S., small-cap firms outperformed: the Russell 2000 index jumped, while the S&P 500 and other major indexes also climbed.
• Markets broadly acknowledged a softening economy, with services activity remaining stable but hiring slowing, dynamics that strengthen the case for a more dovish Fed.
U.S. Dollar Weakness Continues
• The U.S. dollar was on track for a 10-day losing streak, its longest slide in more than half a century.
• The slide reflects market expectations that the Fed will cut rates imminently, combined with speculation that White House economic adviser Kevin Hassett, a candidate for the next Fed chair, might push for aggressive rate cuts.
Euro Gains Amid Diverging Regional Outlooks
• Against this backdrop, the Euro surged to a near seven-week high, underpinned by stronger euro-zone business activity and expectations that the European Central Bank will maintain a relatively steady monetary policy.
• The widening divergence between U.S. monetary policy and that in Europe boosted demand for the euro, reinforcing the dollar’s downward pressure.
What’s Driving the Shift
• Recent U.S. economic releases, notably weak private payroll numbers, have raised doubts about the strength of the U.S. labor market, encouraging investors to price in a rate cut.
• At the same time, bond-market investors have flagged concerns about a potential aggressive policy shift if Hassett becomes Fed chair, adding pressure on the dollar.
• In equities, lower expected borrowing costs improve the outlook for growth and risk assets, supporting stock valuations.
The combination of soft U.S. data, likely rate cuts from the Fed, and steady economic momentum in Europe has pushed global equities higher, while the dollar weakens and the euro strengthens. Investors appear increasingly confident that a more dovish U.S. monetary policy will boost stocks, even as it erodes the dollar’s appeal.
