IMF warns about Trump

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• IMF cuts global outlook, flags risks from Trump

• U.S. 10-year yield spikes above 4.20%

• ECB pushes for more cuts, diverges from the Fed

• Japan’s ruling coalition loses majority; yen weakens

• Stocks snap six-week winning streak

• Oil rises but lags recent $87 peak.

Let’s dissect

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Markets Snapshot

Macro and Fixed Income Markets

• World: The IMF revised its 2025 global growth forecast down to 3.2% in an update of its World Economic Outlook released on Tuesday, a 0.1 percentage point decrease from its July estimate, while maintaining this year’s outlook at 3.2%. It also cautioned about escalating risks, such as geopolitical conflicts and increasing trade protectionism. Inflation is projected to ease from 5.8% in 2024 to 4.3% in 2025. The updated outlook was released during annual IMF/WB meetings in Washington D.C , where bankers, ministers of finance and development, private sector executives, civil society, media, and academics gather to discuss issues of global concern, including the world economic outlook, global financial stability, poverty eradication, inclusive economic growth and job creation, climate change, and others.

• In response to potential Trump’s presidency and concerns over his economic policy agenda, the IMF's economists modeled a scenario where the U.S., Eurozone, and China each imposed 10 percent tariffs on imports—tit-for-tat measures that would impact a quarter of goods trade. The model also included a 10-year extension of Trump’s 2017 tax cuts, reduced net migration to the U.S. and Europe, and higher global borrowing costs. This scenario would reduce growth from the IMF’s baseline forecast of 3.2 percent for next year, potentially wiping out up to 0.8% of global growth if tarrifs hit a more “sizeable swath”. The U.S. GDP would be 1 percent lower than the IMF's baseline for 2025.

• US: In a relatively light week for economic data, the U.S. consumer sentiment indicator rose to its highest level in six months, with Friday’s final reading from the University of Michigan’s Consumer Sentiment Index at 70.5, up from a preliminary 68.9 released earlier, marking the third consecutive monthly increase. The housing market remains a weak point for the U.S. economy, as the National Association of Realtors reported a 1.0% decline in sales of previously owned homes in September compared to the previous month and 3.5% decline compared to September last year.

• Consumer sentiment and housing data did little to stop the rise in dollar and the Treasury yields that started in late September. The US Dollar Index (DXY) index rose further to around 104.3, close to a three-month peak, as sentiment grows that the Federal Reserve will adopt a cautious stance on further rate cuts. The implied probability of a 25 basis point Fed rate cut on November 7th rose to 95.1% last week, up from 90.6% the week before, according to the CME FedWatch Tool.

• The yield on the 10-year U.S. Treasury note climbed for the fifth time in six weeks, ending the trading week on Friday at 4.24%, up from 4.08% the prior week and significantly above its recent low of 3.62% on September 16. 2-year Treasury note rose from 3.97% to 4.12% over the last week. Market anticipation of a potential Trump win in November has added support to the Treasury yields and dollar, given his inflationary policies, including potential increases in tariffs and reductions in taxes.

• Next week, the final one before the U.S. election and the next Fed meeting, will be busy with economic data releases. In addition to more quarterly corporate earnings reports, the U.S. Bureau of Economic Analysis (BEA) will publish its advance preliminary estimate of third-quarter GDP on Wednesday. The BEA will also release the Personal Consumption Expenditures (PCE) Price Index, the FED’s preferred measure of inflation, for September on Thursday. August PCE report showed a 0.1% increase, resulting in an annual rate of 2.2%, while core PCE also rose by 0.1% to 2.7%. Finally, on Friday, the U.S. Bureau of Labor Statistics will release the jobs and unemployment report, revealing how October's employment growth compares to September's unexpectedly strong addition of 254,000 jobs, the highest increase in six months.

• EU: Several European Central Bank (ECB) policymakers—including former hawks—have suggested the potential for further policy easing this year, though they appear divided on the pace of rate cuts. At the annual IMF/WB meetings, ECB President Christine Lagarde and Germany’s President of the Bundesbank Joachim Nagel advocated for a cautious approach. In contrast, central bankers from France, Portugal, and Finland cautioned that the ECB risks falling behind the curve, as weakening economic growth heightens the risk of missing the 2% inflation target. France’s François Villeroy de Galhau emphasized the need for “agile pragmatism,” while Portugal’s Mário Centeno noted that a half-point cut in December “can be on the table.”

• Preliminary October PMI data indicated continued contraction in private-sector activity, with inflation in the services sector remaining elevated due to rising costs and wage pressures. Traders anticipate the ECB will reduce rates to 2% by mid-2025 from the current 3.25%. Meanwhile, solid U.S. economic data has tempered expectations for aggressive Fed rate cuts, supporting the USD.

• Japan: Signs of easing inflationary pressures are contributing to uncertainty regarding the Bank of Japan’s (BoJ) approach to monetary policy normalization. In October, the Tokyo-area core consumer price index (CPI), a key indicator of nationwide inflation, rose by 1.8% year-on-year, slightly exceeding expectations but slowing from September's 2.0%. Overall inflation also decreased to 1.8% in October, compared vs 2.2% the previous month, primarily due to the reinstatement of electricity and gas subsidies. Consequently, the yield on the 10-year Japanese government bond declined to 0.95%, down from 0.97% the previous week.

• Japanese voters headed to the polls on Sunday to elect members of the House of Representatives, an election viewed as a critical test for new Prime Minister Shigeru Ishiba and his administration. A survey conducted by public broadcaster NHK indicated that Ishiba's Liberal Democratic Party (LDP), which has dominated Japanese politics for most of the post-war era, and its junior coalition partner Komeito were projected to secure between 174 and 254 out of 465 seats in the lower house. The main opposition party, the Constitutional Democratic Party of Japan (CDPJ), was anticipated to gain 128 to 191 seats.

• The prospect of a minority coalition following the election raises concerns about the central bank's ability to navigate the ongoing challenge of gradually reducing monetary stimulus. Opposition and ruling parties are advocating for measures to increase wages, which could complicate the BoJ's plans to raise interest rates until there is more clarity on wage trends in the coming year.

• Amidst uncertainty about election’s result, the yen weakened, trading at the upper end of the JPY 152 range against the USD, compared to approximately 149.5 at the close of the week before. The yen was further pressured by a strengthening dollar, as investors perceived a lower likelihood of aggressive interest rate cuts from the Federal Reserve.

Equity Markets

• US: The S&P 500 and Dow dropped roughly 0.9% and 2.6%, respectively, ending a six-week run of gains, while the Nasdaq increased by slightly by 0.34%, marking its seventh consecutive weekly gain due to strong tech stock performance. Although the NASDAQ's Friday close didn’t set a new record, it briefly reached an all-time intraday high earlier in the day, finishing just 0.7% below the record close set three and a half months prior. Large-cap stocks outperformed small-caps, and growth stocks outperformed value stocks.

Commodity Markets

• Oil: Brent crude oil prices climbed nearly 3.3% over the week, reaching close to $76 per barrel on Friday afternoon but falling short of recovering the previous week’s over 7% drop, leaving oil prices significantly below the recent peak of approximately $87 reached in July.

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