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According to IMF estimates, nearly 2 BUSD in additional excess savings have accumulated in the global economy since 2023. That is one-third more than in the corresponding period before the 2008 financial crisis. This time, however, the savings are not flowing into U.S. government bonds, but into the AI boom.
Investments in AI infrastructure are keeping global economic growth at of around 3% despite the energy shock. However, IMF Managing Director Kristalina Georgieva warns that artificial intelligence is a "slow-moving tsunami" that will revolutionize the labor market, taxation, and education.
Last week was positive for the US stock market, whereas the Helsinki Stock Exchange saw a slight decline, and the Stoxx 600 index ended the week flat in Europe. US stock indices hit new records once again, while government bond rates rose to multi-decade highs in a growing number of developed economies.
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The yield on France's 10-year government bond has been testing the 5% threshold for the first time since 2002. France, previously considered stable, is now paying more for its loans than former crisis countries Greece and Italy.
Eurozone households hold nearly 10 BEUR in cash and deposits, but 80% of them do not own shares or other investment instruments. Households shy away from risk even more than expected.
Almost as much crude oil is already passing through the Strait of Hormuz as before the Iran war. However, the flows of refined products, such as diesel, remain a fraction of normal, which is reflected in fuel prices here and elsewhere.
The weaker-than-expected employment report for September took the wind out of interest rate expectations. There is plenty of volatility, but the big picture of the labor market did not change substantially, however.
The AI hype and the resilience of the stock market despite rising interest rates have justifiably raised questions about a new bubble, especially in the US. You can really smell the bubble in the air if you take a good sniff.
The ECB's interest rate decisions are closely monitored, but central bankers' remarks between meetings can move the markets just as much. For longer-term interest rates, their overall impact is even greater.
Government bond yields continued to rise last week, and long-term interest rates in the US are now above 5%. At the same time, households' short-term inflation expectations accelerated significantly, and expensive fuels are maintaining price pressures.
The Fed delivered a rate hike, and in addition, economic and interest rate estimates were updated in a slightly more hawkish direction. The central bank was finally unanimous in its decision, meaning the dissenters disappeared from the meeting table.
The US Federal Reserve will announce its interest rate decision on Wednesday. An interest rate hike is already nearly certain, which would take the policy rate to the 3.75–4.00% range.