After a long series of shockingly-positive data releases out of the United States, investors are suddenly more convinced that policymakers will succeed in pulling off an “immaculate disinflation” – in which price growth comes back to target without triggering a big rise in unemployment. Equity valuations, long-term yields, financial conditions, and consensus economic forecasts are all pointing to stronger conviction in a “soft landing” scenario, and a growing number of previously-bearish market pundits have pivoted, pushing recession forecasts into late 2024 and beyond.

Currency markets have realigned, with the greenback following archetypal “smile” dynamics in falling against its counterparts in the rest of the world. Powerful momentum factors are driving other majors – including the pound, euro, and yen – higher, snapping resistance levels that had remained in place for months. If major shocks can be avoided and underlying price pressures keep cooling through the summer months, this risk-taking mechanism in financial markets might accelerate, lifting asset prices higher, generating self-reinforcing dynamics in consumer spending and labour markets, and weighing on the dollar.

Equity market capitalisation by country, billions USD