Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

U.S. stocks, bond yields and the dollar all fell on Thursday, dragged down by renewed fears of an AI bubble and worries over the strength of the U.S. labor market.  

More on that below. In my column today I look at life for markets after the global rate-cutting cycle, which appears to be turning. Will it signal a bullish period for earnings growth and stocks, or a tightening of liquidity and greater risk aversion? 

I’d love to hear from you, so please reach out to me with comments at jamie.mcgeever@thomsonreuters.com. You can also follow me at @ReutersJamie and @reutersjamie.bsky.social. 

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* Navigating the U.S. jobs fog

Normally, investors now would be gearing up for the October U.S. non-farm payrolls report scheduled for release on Friday. But the record long U.S. government shutdown means there will be no data. Some numbers have come out this week though, and it's very much a mixed bag.

ADP private sector job growth numbers for October were stronger than expected, but Challenger layoffs nearly tripled, and the Chicago Fed said the unemployment rate has ticked up a notch to 4.4%. Cost-cutting and AI are dark clouds over the labor market, which is already foggy enough.  

* U.S. money market tightness

There was some respite on Thursday as Fed rate cut expectations ticked up, but worries around U.S. interbank and money market liquidity continue to swirl. Of course, the Fed is watching this like a hawk - no pun intended - and will surely step in if they have to.

But as TS Lombard puts it, things are "uncomfortably tight" - a government shutdown, a Treasury General Account build draining funds from the system, high front-end rates, and the SOFR-IORB spread widening. Add in ongoing QT for now and seasonal balance-sheet constraints, "and the ingredients for a funding-market flare-up are all there." 

* Trump's tariff travails

The legality of U.S. President Donald Trump's tariffs - his flagship economic policy - is in doubt as U.S. Supreme Court justices decide whether the 1977 International Emergency Economic Powers Act (IEEPA), which Trump has invoked, covers tariffs. 

Trump on Thursday for the first time acknowledged that U.S. consumers "might be paying something" when it comes to tariffs. That "something" has been pretty low so far this year, but is now rising - economists reckon consumers will be eating around two thirds of the total tariff bill by next year. 

The global interest-rate cutting cycle has likely peaked. The question now is when, or if, today's high-flying markets will start to feel the pinch. 

Remarkably, there have been more rate cuts around the world in the last two years than during the 2007-09 Global Financial Crisis, according to Bank of America. Although that's the number of cuts and not the magnitude of easing, it reflects the scale of the historic inflation-fighting rate hikes in 2022-23. 

But the cycle now appears to have turned. This doesn't mean global easing has stopped. Central banks – most notably the U.S. Federal Reserve – are still expected to cut further. Rather, the number of cumulative cuts will decline moving forward. 

On the face of it, the end of super-easy monetary policy should mean less accommodative financial conditions ahead. 

But, perhaps counterintuitively, history suggests otherwise. Peaks in the last three major global easing cycles were followed by a broadening of the earnings cycle and solid equity market gains. 

Are we about to see this again? Maybe, but given the frothy valuations in many of today's markets, it's not a given this time around.