Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

The Dow Jones Industrial index crept up to a new high on Tuesday but other U.S. indices fell and Treasury yields slid, after unexpectedly soft U.S. retail sales figures raised doubts about the strength of the consumer and the broader economy. 

In my column today, I look at the peculiar juncture the world economy is at right now - growth seems solid, markets are buoyant, an AI capex boom is underway, and there's no pandemic or financial crisis to fix. Yet governments are spending like crazy. It's a challenging environment for bond investors.

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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* Rotation, rotation, rotation

Whether it's across national boundaries, between industries, or intra-sector, the pace and scope of equity investors' rotation is increasing. The Dow is hitting new highs, the small caps Russell 2000 isn't far behind, while tech-heavy Nasdaq is lagging. 

It's part of the wider trend setting the tone for 2026, of active management taking the place of passive index-buying, investors being forced to pick winners and losers, and hedging and diversification taking on added significance.

* U.S. JANUARY JOBS, ANNUAL REVISION

January's U.S. employment report on Wednesday is expected to show payrolls rose by 70,000, up from 50,000 in December, while the unemployment rate held steady at 4.4%. More importantly, perhaps, revisions for the year through last March could show the economy created hundreds of thousands fewer jobs than first thought. 

A degree of expectations management is coming from the White House, with officials noting that low hiring doesn't necessarily signal a weak jobs market because labor supply is also shrinking. Fed Chair Powell said in December the labor market seemed surprisingly resilient. We shall see.

* China's FX juggernaut

China's yuan is going from strength to strength, breaking through 7.00 per dollar late last year and now printing new three-year highs against the greenback on an almost daily basis. A test of 6.90 per dollar is imminent.

Beijing's preference for a stable yuan seems to have given way to favoring a stronger currency. This will no doubt please Washington, and Treasury Secretary Scott Bessent on Monday said that U.S.-China relations are in "a very comfortable place." The same probably goes for traders short dollars and long Asian FX right now too.

The global economy is at an odd juncture, one that points to an ugly few years for bond markets. 

The fiscal picture across developed economies is deteriorating rapidly and uniformly, yet unlike previous bouts of huge government spending in the last two decades, there is no global financial crisis or pandemic requiring trillions of dollars. 

So why are governments loosening their purse strings so much, and do investors have the appetite to digest all this new debt?