​The eyes of market participants are on the upcoming Fed decision this week. So far, the Fed has not cut rates, which is in stark contrast to what the markets had expected earlier in the year and throughout the year. Inflation, a key factor in the decision, is showing promising signs but remains sticky. The very low unemployment rate has so far led the Fed to no interest cut, as the economy is in an acceptable state despite inflation. However, the indicator is also starting to worsen. Unemployment has been steadily rising in 2024. This is certainly a worrying trend, but at 4.2% the unemployment rate is still very low by historical standards. Volatile equity markets are another threat to a potential recession. The Fed's policy balancing act is therefore crucial. It is now widely expected that the Fed will cut rates by 25bps at the upcoming meeting, with some forecasting a 50bps cut, although support for this view has waned since the August economic data. Based on current expectations, market participants are pricing in between 50bps and 100bps of rate cuts by the end of 2024. At this point, a 50bps cut seems more likely, with a cut this week and in December, when the Fed has had some time to monitor the impact of the first cut. On the more optimistic end, a 50bps cut is expected this week, with two 25bps cuts in the following two meetings. Figure 1 shows the federal funds rate throughout 2024 and where it could end up by December 2024. The Fed's rate cuts have also been discussed more prominently following the ECB's rate cut. The ECB has cut its deposit facility rate twice to 3.5% in 2024 from 4% at the beginning of the year. Inflation in Europe has shown similar stickiness to that in the US. In contrast to the US, this stickiness has been at lower levels, which helps the ECB to justify rate cuts. While inflation in the US has mostly been between 3% and 4%, inflation in Europe has mostly been between 2% and 3%. For Europe, market participants expect one or two more 25bps cuts by the end of 2024.
This would leave the ECB's deposit facility rate between 3.25% and 3%. This path is shown in Figure 2.

​US equities have had an impressive run so far in 2024. Since July, however, markets have generally trended lower. With one exception in April, equities rose steadily until July. This resulted in peak performances of 50% for the Magnificent 7 and 25% for the Nasdaq. The Dow Jones Industrial Average gained just 5%. The stark differences in performance can be explained by what drove the stock market. With most macroeconomic indicators showing worrying signs, the labour market has so far offset most of the negative signals. However, the labour market is also becoming more worrying as unemployment rises. Interest rates were originally expected to be cut relatively early in the year, which also boosted equities. With no rate cuts this year and considerable uncertainty as to when the first cut will be made since the increases, equity markets have suffered. Now that the labour market looks weaker than before, the equity market is in a difficult position. These concerns led to a decline in July and early August, culminating in the unwinding of the USD-JPY carry trade, which caused huge losses. This, combined with recession fears, led to sharp declines around the world and a huge spike in volatility. Since then, equities have rallied, recovering much of their earlier losses. Figure 1 shows the performance of various US equity indices in 2024.

Inflation has been a core topic since 2021, when inflation started to soar around the world. In response to this, the majority of central banks have taken the step of significantly increasing interest rates in order to combat the steep rise in inflation. Between the second half of 2022 and the first half of 2023, these measures, in conjunction with a stabilising economy, contributed to a reduction in inflation. By the end of 2023, inflation had fallen below 4% in most countries, as illustrated in Figure 1. While there have been significant differences in the prior years, the subsequent development has been consistent, albeit with varying magnitudes. In 2024 to date, inflation has stabilised, with most economies showing inflation rates between 2% and 4%. Switzerland is an exception, with inflation closer to 1%. In contrast to earlier expectations, inflation has proven to be more persistent than anticipated, with rates remaining above the frequently targeted maximum of 2%. The most notable exception was the UK, which has been hit hardest by inflation for the same reasons as other economies, but they still had to deal with the consequences of Brexit. Great Britain started in 2024 with an inflation of 4% and has since come down to 2%, where it remains steadily, whereas most other economies’ inflation has remained mostly flat throughout 2024.
As mentioned previously, central banks significantly raised interest rates to combat soaring inflation. The increases commenced at the end of 2021 and continued well into the summer of 2023, and autumn of 2023 for some countries. Since, interest rates were kept at these high levels for most of 2024 with some relief in some economies more recently. In March 2024, Switzerland became the first country to cut interest rates, followed by another reduction in June 2024. It is noteworthy that Switzerland is the only country where inflation has remained below the 2% target maximum since the summer of 2023. In June 2024, the European Central Bank followed suit by reducing interest rates (main refinancing operations rate) to 4.25%. More recently, the central bank hinted at a slower pace of interest rate cuts than anticipated after the initial cut. In August 2024, the Bank of England became the last economy to cut interest rates by 25bps to 5% in response to the promising development in inflation. In the United States, interest rates have remained unchanged since July 2023, currently sitting at 5.25%. The Fed has been hesitant to lower interest rates amid concerns about the stickiness of their inflation, as inflation has remained relatively steady since June 2023. It is also worth noting that Japan's situation is completely different. The country is renowned for its distinctive approach to monetary policy, exemplified by its central bank. The country maintained its negative interest rate throughout the period of the pandemic and its aftermath. In March 2024, the Bank of Japan increased interest rates and followed with an additional hike in July 2024. The first hike was particularly noteworthy, as the country had not raised its interest rates in 17 years. The second hike was to address two issues. The central bank also announced a bond tampering programme to boost the economy and raised interest rates significantly to combat the weakening Japanese Yen.

​The US election campaign is moving fast. Trump is leading the polls, although the race is likely to be very close. After the assassination attempt on Trump, the Republicans moved their conference forward and declared Trump as their nominee with Vance as his vice-presidential candidate. Trump has been the clear Republican nominee since relatively early in the primaries, when he won most of the votes. On the Democratic side, things have also been complicated. Initially, Biden seemed to have the nomination wrapped up, but this was gradually called into question. Since the Biden-Trump televised debate, voices around Biden's state have grown louder, leading to Biden's decision to withdraw from the race and endorse Harris as the Democratic presidential nominee. Harris kicked off her candidacy with a strong speech. Although Harris does not yet have the Democratic nomination, it is likely that she will soon be announced as the official Democratic candidate. Her late entry into the race certainly complicates the situation, but the polls do not seem to have changed much from when Biden was the Democratic frontrunner. A more detailed comparison of the two candidates' agendas, along with more debates, will provide more details. Trump is currently leading, but the election will be close.
Meanwhile, equity markets have also been on the move. In recent weeks, equity markets have mostly fallen. Increasingly high valuations of technology companies led to concerns and triggered several sell-offs in recent days. This was exacerbated by poor financial results from Alphabet and Tesla. Since 10 July 2024, the Magnificent 7 have lost more than 10%, wiping out $1.7tn in value in a matter of weeks. Figure 1 shows the fall of the Magnificent 7 alongside other major US indices, which also fell, but by a much smaller amount. The results of Apple and Microsoft in the coming weeks will be crucial in determining whether the current slide can be halted or accelerated. The S&P 500 and Nasdaq also fell significantly, again largely driven by the Magnificent 7 and other tech-oriented companies in the indices. The Dow Jones managed to limit the fall significantly, as part of the recent decline has been a shift from riskier tech stocks to more quality oriented companies.