US economic surprise indices are sitting at the highest levels since 2020 as incoming data keeps topping forecasts, defying expectations for a policy-induced slowdown. Upheaval in the US banking sector seems to have ended without inflicting lasting damage on lending conditions. Consumer demand remains remarkably robust. Core inflation is still high. Labour markets are hot. Financial conditions are accommodative, and asset prices are melting up.
Yet after a record-breaking 11-year bull run, the greenback remains well below its September peak, and selling pressure has accelerated since mid-July’s softer-than-anticipated inflation print led markets to assume an imminent end to the Federal Reserve’s tightening cycle.

Market participants expect yield differentials to narrow in the latter half of the year, with slowing growth and inflation rates supporting a more dovish monetary policy outlook in the US, even as central banks in Europe, the United Kingdom, and Japan remain in inflation-fighting mode. Relative rates are seen turning even less supportive in the years ahead, when the Fed is expected to cut far more aggressively than its peers.

Market-implied change in central bank policy rates, %