Global markets shift as Fed Policy, US slowdown boost emerging economies
BY GODWIN ANYEBE
As the Federal Open Market Committee (FOMC) convened last week, a key focus will be the Federal Reserve’s Summary of Economic Projections (SEP). These projections will indicate whether the Fed is prepared to substantially downgrade its macroeconomic outlook.
While a shift toward rate cuts seems unlikely in the near term, such adjustments may be considered in the second half of the year.
Benoit Anne, senior managing director and insights advisor at MFS Investment Management, notes that “tracking Fed sentiment remains crucial, as the central bank still leans hawkish, though less so than in previous weeks.” He adds that a stabilising message from the Fed could reassure markets, reinforcing confidence in the resilience of the US economy.
For some time, the notion of US exceptionalism—marked by superior economic growth, a strong dollar, and robust stock market performance—dominated investor sentiment. However, this theme is now being challenged as global markets undergo a shift. Growth expectations in the US are being revised downward, while forecasts elsewhere, particularly in Europe, are improving.
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Anne describes this shift as a move from “exceptionalism to normalism,” as economic growth in different regions converges. The weakening of the US dollar further reflects this transition, with investors increasingly looking at opportunities in undervalued markets such as Europe. “With Germany leading a recovery in Europe, it has become harder to be bullish on the dollar,” he explains.
Concerns over a potential US recession have resurfaced, particularly as sentiment-based indicators, such as consumer confidence, have weakened. The University of Michigan’s consumer sentiment index recently dropped to 57.9, its lowest level since 2022. However, Anne believes these fears may be exaggerated.
“There is a disconnect between sentiment and hard data,” Anne notes, pointing to the Market Insights’ Business Cycle Indicator, which signals a moderate slowdown but remains far from indicating a recession. The US economy continues to show resilience in key areas, including a strong labour market and steady corporate profit margins.
Emerging markets poised for a comeback
The erosion of US exceptionalism has significant implications for global asset allocation, particularly for emerging markets (EM). Despite previous concerns that EM assets might struggle under another Trump presidency, the reality has been different. A weakening US dollar and strengthening global growth—driven largely by EM economies—have set the stage for renewed interest in EM debt.
“Emerging markets are back,” Anne asserts, citing recent global composite Purchasing Managers’ Index (PMI) data that highlight stronger growth outside developed economies. He also notes that, in recent weeks, macroeconomic risks have been concentrated in developed markets, making EM exposure a potentially effective diversification strategy.
Japan’s yields surge to multi-decade highs
One of the most significant market movements in recent weeks has been the sharp rise in Japanese government bond (JGB) yields. The 10-year JGB yield now trades around 1.50%, a level not seen in decades. This shift is largely attributed to monetary policy expectations, as the Bank of Japan (BoJ) appears firmly committed to policy normalisation, with potential tightening measures extending beyond 2025.
“Japan is one of the few markets is where being short duration makes sense,” Anne explains. Higher domestic yields could also reshape Japanese investor behaviour, reducing the need to chase higher returns abroad. If this trend continues, it could have broader implications for global markets, possibly contributing to further US dollar weakness in the future.
