While economic data continues to show soft momentum, the prospect of monetary easing has shored up confidence and lifted many major global equity markets. Elsewhere, renewed questions about the sustainability of public finances across several major economies have been exerting upward pressure on long-term bond yields. In this economic update, we exploring these economic factors and how these will impact the market outlook.
We are also sharing the most recent Economic Webcast from RBC Global Asset Management’s chief economist Eric Lascelles, where he provides a deep dive into the current and anticipated impacts of tariffs on the markets, as well as a number of other key performance indicators from the U.S. economy.
Economic Update
September seasonality
Since 1928, September has been the S&P 500’s weakest month, with an average monthly decline of 1.2%, under-performing all other months. September returns were also negative 55% of the time over this period. Similar seasonal patterns are also seen in the U.K. and Canadian markets. Given this historical seasonality and with earnings catalysts largely behind us, market participants are likely to turn their attention towards economic data, monetary policy signals, and policy developments out of the White House. Beyond short-term seasonality, however, corporate earnings fundamentals continue to look solid and remain the long-term foundation for equity markets.
Watching the U.S. data
Signs of continued softening in the U.S. labour market have pulled forward market expectations for a Federal Reserve rate cut to as early as this month. July’s underwhelming jobs report was accompanied by large downward revisions to the prior two months’ figures. At the same time, inflation remains above the Fed’s 2% target, with some indicators suggesting that price pressures could flare up again. The backdrop means Fed policymakers will need to navigate a delicate balancing act between supporting growth and price stability. Growing optimism for monetary easing has helped bolster equity markets since the Fed’s Jackson Hole symposium in late August, making upcoming jobs and inflation data crucial in shaping the outlook for interest rates.
Bond markets
While short-term Treasury yields in the U.S. have fallen on rate cut expectations, long-term yields have risen, resulting in a “steepening” of the yield curve. Several factors have likely contributed to this dynamic, including concerns around the U.S. budget deficit and the Trump administration’s rhetoric that raised questions around central bank independence.
But higher long-term bond yields have been a global phenomenon, with 30-year government bond yields in several major developed nations (U.K., Germany, France, Japan) recently reaching their highest levels in over a decade. A common thread behind the upward pressure on long-term yields is elevated budget deficits, as many governments face increasingly complex fiscal trade-offs, balancing political priorities, defense spending, and industrial policy for strategically important industries with the need for fiscal restraint to maintain credibility in public finances and investor confidence.
Summary
Resilient corporate earnings and optimism over potential Fed rate cuts have helped support global equity markets, allowing them to extend gains despite a tepid economic growth environment. But with September’s historical tendency towards weakness and valuations that appear to reflect an upbeat outlook, we believe “invested, but watchful” remains a sensible posture for portfolios as we continue to monitor economic data, earnings trends and global bond yields.
Economic Webcast: U.S. and global economy faring better than expected
Anxiety remains around the impact of U.S. tariffs – with concerns that some of the damage from these tariffs could be lagging and still to be felt. However, it has to be acknowledged that the U.S. and global economies have performed a little bit better than conventional economic theory would suggest.
In this most recent episode of the Economic Webcast, RBC Global Asset Management’s chief economist Eric Lascelles does a deep dive into the impact of tariffs so far, some of the other economic headwinds being felt, as well some of the anticipated policy changes that could be coming by the end of this year.
You can watch the full webcast by clicking the link here.
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