The move up in bond yields, US stocks (record highs in October), and Europe indicate markets’ perception of a perfect scenario centered around strong US growth and falling inflation and a positive impetus from monetary easing in Europe. Although we acknowledge the resilience of US, we think not all data in the US and Europe has been straightforward. In China, the key question is whether the fiscal policy will meet expectations and deliver a sustainable boost to economy. In this muddling in the middle scenario, the following factors could drive the global economy:

• Labour demand from companies is cooling. Amid a deterioration in US job markets, we expect an increase in the unemployment rate. Recent data show a continuation of the downward trend in job postings, hiring and wage growth. Consumers might respond to this ‘less hot’ labour market by curtailing non-essential spending.
• Downward trend on inflation is maintained in US and Europe. Inflation should reach close to the Fed’s target around mid-2025. Some risks may emerge from sticky components and policies of the new US government. Europe could witness uneven growth and subdued domestic demand.
• Central banks will look through the temporary volatility on inflation, if any. Markets’ expectations on the Fed are now closer to our internal projections of two more rate cuts this year. The ECB has already delivered a rate cut in October as expected and is likely to cut once again this year.
• Chinese authorities have indicated their desire to make a policy shift but a clear direction to address the problems, for instance in real estate, is essential for a lasting impact on economic growth.

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