Economic and financial risk insights: global divergence in growth and monetary policy is intensifying

• Growth paths are diverging in the largest economies, with the US growing strongly in Q3 2023 while momentum is slowing elsewhere.
• We revise up our US 10y Treasury yields forecast, but a strong USD and higher long-term yields will likely add to risks for the rest of the world.
• Monetary policy prospects are also diverging: the hiking cycle is likely at an end for the US Federal Reserve and ECB, but still open for Asian policymakers.

Major economies' growth paths as increasingly diverging. The US shows sustained resilience with a stronger-than-expected 4.9% annualised GDP growth in Q3 2023 as inflation eases. However, the October payrolls were lower than prior months and the unemployment rate rose in signals of labour market weakening.

In contrast, euro area GDP growth contracted in Q3 (-0.1% q-o-q), weighed down by the transmission effect of tighter monetary policy, ongoing fiscal drag, and lower liquid excess consumer savings. We see risks skewed to the downside and euro area economic stagnation likely getting more severe in H2 2024. China's economy grew by 4.9% y-o-y in Q3 2023, but it faces significant structural headwinds, and the October manufacturing PMI returned to contraction. Globally, the adverse impact of tighter monetary policy on the real economy is increasingly evident, more so internationally than in the US. 

The seismic regime shift in sovereign bond markets is durable in our view. We revise up our US Treasury 10y yields forecasts to 4.7% (+80bps) for year-end 2023 and 4.2% (+70bps) by year-end 2024, and now expect an average 4.2% yield (+40bps) over the long run – well above the 2.5% average in the decade following the global financial crisis. Rises in Japan's 10-year government bond (JGB) yields, the world's low yield "anchor", are also anticipated in 2024 as the Bank of Japan (BOJ) is likely to exit its extraordinary easing policies, which could lift global yields broadly next year. 

Rate hikes may be over in the US but are likely to resume elsewhere. In response to higher US yields, a stronger US dollar and higher transmitted inflation, the BOJ relaxed its 1% yield curve control policy to allow more yield flexibility. The Reserve Bank of Australia too, after a pause, raised its policy rate by 25bps in October. The strong US dollar keeps rate hikes more likely for Asian central banks in the coming months, and adds to the challenge facing China to implement further easing, given Asia's currency depreciations and muted inflation. In the US and Euro area, we see the hiking cycle as over, although with no rate cuts imminent. Headline US CPI declined to 3.2% in October, while core inflation moderated to 4%. Euro area's headline inflation eased to the lowest level over past two years in October (2.9%) though the pace of decrease in core CPI slowed. We see policy rates in both economies staying restrictive given persistent above-target inflation: policy trade-offs will likely be an increasing challenge for central banks.

We revised higher our growth forecasts for major economies amid economic resilience in 2023. A global slowdown in 2024 is still our baseline. We revised up our 10y sovereign bond yield forecasts, reflecting tighter monetary policy for longer.