News Digest:

According to Deloitte’s weekly Global Economic Update, shifting inflation expectations in the U.S. are driving movements in bond yields and currency values, largely influenced by anticipated policy changes. Since mid-September, the five-year breakeven inflation rate has risen by 50 basis points, with a sharp spike following the U.S. election. Policies like tax cuts and deregulation are expected to stimulate economic growth and inflation, while potential tariffs could elevate import prices. These factors have contributed to rising bond yields and a stronger U.S. dollar.

A stronger dollar impacts global economies, creating inflationary pressure in countries with depreciating currencies while boosting their export competitiveness. Conversely, the higher-valued dollar reduces U.S. inflation and weakens export competitiveness, potentially mitigating tariff-driven price increases. Tariffs may also prompt foreign companies, especially in the auto sector, to invest more in U.S. operations.
China faces unique challenges due to its managed exchange rate. A stronger dollar puts downward pressure on the renminbi, forcing China’s central bank to either sell dollars—tightening its money supply—or let the currency depreciate. Depreciation could partially offset the U.S. tariffs’ impact, a strategy China employed during the 2018 trade dispute.

Emerging markets are similarly affected by dollar strength, with depreciating currencies fueling inflation and tighter monetary policies. Fixed exchange rates complicate these responses, though weaker currencies can enhance export competitiveness.
Rising bond yields also reflect expectations of slower Federal Reserve rate cuts. Fed Chair Jerome Powell recently signaled no urgency to reduce rates, bolstering investor confidence. Market probabilities now show a reduced chance of a December rate cut, reflecting Powell’s cautious approach.

End Notes

Source: https://www2.deloitte.com/us/en/insights/economy/global-economic-outlook/weekly-update.html/