While data shows resilience and strength in the U.S. economy, Europe appears to be slipping into contraction territory, weighed down by energy challenges, political uncertainty, and the looming threat of U.S. tariffs. The U.S. services PMI rose a robust 2 points, while the manufacturing and services PMIs for Germany and France plunged below 50. This economic divergence led to sharp moves in currency markets, with the Euro falling over 2% against the resurgent U.S. dollar to a two-year low of 1.03.

Bond Markets Signal Contrasting Policy Expectations

Bond markets are now pricing very different monetary policy paths on either side of the Atlantic. Odds of a 50bp rate cut by the European Central Bank in December have risen to 50% amid Europe’s dismal data. Meanwhile, expectations for further Fed easing have dropped, with just a 50% chance of a December cut. Upcoming U.S. CPI data will be pivotal—a reading above 0.3% could eliminate the possibility of any cut.

Europe's Economic Struggles: Energy, Politics, and Tariffs

Europe's challenges appear largely internal. Political instability in France and Germany is weighing on sentiment, while the UK economy is losing momentum with deeply negative retail sales and PMI data. Adding to the strain, U.S. tariffs could pose a major threat to Europe’s fragile economy. While such pressures might push the Eurozone toward fiscal integration and joint bond issuance, political divisions remain a significant obstacle.

U.S. Resilience Amid Inflation Concerns
In contrast, U.S. policymakers remain cautiously optimistic. Inflation appears to be steadily declining, but persistent stickiness in prices and wages could slow the Fed’s easing path. Political polarisation continues to colour sentiment, but the U.S. economy retains its position of strength relative to Europe.

A New Policy Direction Under Bessent
Investors are welcoming Bessent as a "safe pair of hands" given his finance industry background and perceived orthodoxy compared to other Trump cabinet picks. In a Wall Street Journal interview, Bessent struck a measured tone on tariffs, framing them as a negotiating tool to be deployed gradually rather than an immediate bludgeon. This assuaged some market fears of a destabilising trade war.

Bessent is also backing business-friendly policies like middle-class tax cuts and incentives to boost domestic oil production by 3 million barrels per day. Small-cap stocks, as measured by the Russell 2000, outperformed with a 1.5% gain on the day, potentially reflecting optimism about Bessent's plan to eliminate taxes on tips for restaurant workers and other small businesses. However, Bessent did raise some eyebrows by entertaining the notion of a central bank "shadow chair," which could threaten Fed independence.

Key Risks Ahead: Monitoring CPI and Global Trade Dynamics

U.S. exceptionalism looks set to continue, with recession risks far higher in Europe. However, key events in the coming weeks—U.S. inflation data and Black Friday spending—will provide critical insights into the health of America’s economy and its resilience in the face of global uncertainties.