Weekly Global Economic Update
What’s happening this week in economics? Deloitte’s team of economists examines news and trends from around the world.
Contradictory US economic news drives expectations of monetary policy
- Last week, in the United States, there was some good economic news, and investors appeared to respond accordingly. In the second quarter, growth in real gross domestic product was upwardly revised, while inflation eased slightly in August. These factors likely contributed to investors’ expectations that the Federal Reserve is less likely to tighten monetary policy at its next meeting. The result was an initial rise in equity prices before they reverted. Yet, bond yields continued to rise despite the good inflation news. Let’s look at the details:
In the United States, August was a good month for consumer spending, despite no growth in real income. Specifically, the US government reported that, in August, real (inflation-adjusted) disposable personal income (income after taxes) was unchanged from the previous month.
Yet, real personal consumption expenditures were up 0.6% from the previous month. This took place because the personal saving rate dropped from 4.6% in July to 4.1% in August; as recently as January, it was 5.6%. Households are keen on maintaining their standard of living in the face of declining real wages. Yet, reduced savings can only go so far. If real incomes continue to stagnate, eventually it may have a negative impact on consumer spending.
Meanwhile, the US government also reported on the personal consumption expenditure deflator (PCE-deflator)—the Fed’s principal measure of inflation—which was up 3.4% in August versus a year earlier. This was the same level as July and lower than the three preceding months. Plus, the PCE-deflator was up 0.3% from July to August—the biggest monthly gain since May. When volatile food and energy prices are excluded, the core PCE-deflator was up 3% in August versus a year earlier—the same as in June and July and lower than in the previous three months. Core prices were up 0.3% from July to August, which was the biggest gain since April.
This report suggests that inflation is not accelerating, despite a recent jump in oil prices, new tariffs, and strong demand from the technology sector. This news pleased investors, who then revised their expectations for monetary policy. The futures market’s implied probability that the Fed will raise its benchmark interest rate next month fell. The probability of two rate hikes before the end of this year fell as well.
Despite the favorable news on inflation and a reduced expectation for monetary tightening, the yield on the US Treasury’s 10-year bond continued to rise. The yield passed 5.3% today for the first time since 2002. It is likely that the rise in the bond yield meant that investors were more focused on the state of the real economy rather than inflation or Fed policy. Indeed, there was positive news regarding the strength of the economy. The US government released a revised estimate of second-quarter GDP. Previously, the government estimated that real GDP grew at an annualized rate of 1.5% in the second quarter. Now, it says real GDP grew at a rate of 2.2%.
Moreover, growth in consumer spending was revised from 3.4% to 3.8%. And if imports and exports, inventories, and government spending are excluded, the economy grew at a rate of 4.6%—revised upward from 4.2%. This is often considered a good measure of underlying domestic private sector demand. As such, investors saw an economy that appears to be exceptionally strong in the second quarter.
Plus, based on recent purchasing managers’ indices, the economy might have been strong in the third quarter. This may help to explain rising bond yields. On the other hand, if bond yields continue rising, it could have a negative impact on credit-market activity, especially in the housing market, which, in turn, could ultimately cause an economic slowdown.
On the other hand, the US government reported that employment growth was surprisingly weak in September. This, in turn, led investors to further downgrade their expectations for monetary tightening. Of course, one month does not make a trend. Yet, investors saw the September report as potentially signaling a weakening of the economic picture and, consequently, weaker inflation. Let’s look at the details:
The US government publishes a monthly employment report that includes the results of two surveys: One is a survey of households; the other is a survey of establishments. The latter determined that, in September, only 29,000 new jobs were created, down from 133,000 in August. Moreover, employment fell in July and grew only modestly in June. Thus, employment grew strongly in only one of the last four months, which could signal weakness.
Moreover, in September, employment fell in financial services, professional and business services, information, mining, and all levels of government (federal, state, and local). Employment grew by 23,000 in healthcare and social assistance. Plus, employment grew by 10,000 in leisure and hospitality. Thus, excluding these two categories, employment declined modestly in September.
The establishment survey also includes data on average hourly earnings. This indicator was up 3% in September versus a year earlier—the smallest increase since May 2021. Moreover, with inflation running well above 3%, real (inflation-adjusted) earnings are declining. This could weigh on consumer spending. In recent months, spending has grown faster than income because households have been cutting back on saving. This cannot go on indefinitely.
The separate survey of households, which includes self-employment, found that, in September, the labor force (those either working or seeking work) grew significantly faster than the working-age population, which means labor-force participation increased. On the other hand, employment grew more slowly than the labor force, leading the unemployment rate to rise from 4.1% in August to 4.2% in September. Still, the unemployment rate remains very low.
This jobs report, which suggests the possibility of weakness, led investors to revise their expectations for Fed policy. Specifically, the futures market’s implied probability that the Fed will keep the benchmark interest rate unchanged later this month, increased. Indeed, this view was echoed in comments by two Fed leaders: Philip Jefferson, member of the Federal Reserve Board, and John Williams, president of the New York Fed.
Jefferson said that “since our September meeting, yields across the term structure have increased further, a sign that investors are reassessing the evolving macroeconomic landscape. My colleagues and I will need to come to our own judgment, which may take more time.” Williams said that there is “no need for urgency” about deciding on rate increases. These comments appeared to influence futures market probabilities.
Economic impact of rising US bond yields
- The yield on the US Treasury’s 10-year bond recently exceeded 5.3%, having surged considerably in recent weeks. Some observers say that there is no need for alarm given that this level was typical prior to 2007. This is true, but there is more to the story. Before 2007, the yield was around 5% because inflation was often higher than today. Investors expected higher inflation and required an inflation premium to offset the risk of purchasing long-term bonds.
Lately, inflation expectations have been relatively tame and stable, despite sharp rises in bond yields. The rise in yields appears to be largely due to an increase in the yield after inflation (the real yield). This is not simply my opinion. Rather, we can estimate investor expectations of inflation and, consequently, the real yield on bonds. And, as of now, the real yield is at a record high.
Thus, contrary to what some observers say, this is not simply a return to the normalcy seen before 2007. Rather, it likely reflects at least a partial shift in supply and demand conditions in the bond market. The massive issuance of bonds by technology companies has likely increased demand for credit, thereby contributing to the rise in real yields. It may also reflect an increase in the risk premium that investors require to hold bonds. That likely has to do with increasing concerns about fiscal sustainability.
Should we be worried? Perhaps. A high real yield means that the true cost (after inflation) of borrowing money is very high. That, in turn, will likely have a negative impact on credit-market activity. It could dampen activity in the already weakened US housing market. After all, mortgage interest rates follow Treasury bond yields. And it could stifle transactions such as mergers and acquisitions. On the other hand, high real yields could simply reflect expectations of a strong economy and, consequently, strong demand for credit.
What about tech investment in artificial intelligence? Technology companies have issued a massive volume of debt to fund the rollout of data centers. Plus, they plan to continue issuing more debt in the near future. High real yields on bonds will mean a higher cost of servicing those debts. That, in turn, means that, to service the debt, these companies will need to generate more cash than previously anticipated. This could create additional pressure at a time when US-based tech companies are facing increased competition from Chinese suppliers of AI services.
And what about the government? Higher real yields mean that the true cost of servicing the government’s massive debt is now higher than previously. Plus, it likely means that any decision to accelerate government borrowing (such as in response to an economic downturn) could be met by a further rise in yields. It means that the government may have less flexibility to make new fiscal choices.
The United States is not alone: Real yields have risen sharply in many other countries. The market for sovereign debt is a global market that crosses borders. A rise in demand for credit by US technology companies can influence the global supply and demand conditions for bonds, thereby boosting yields around the world. Plus, concerns about fiscal sustainability are not unique to the United States. Such concerns are also prevalent in Japan, the United Kingdom, France, and Italy, to name a few countries.
If leaders want to reduce real bond yields, one approach would be to announce credible plans to shift the trajectory of fiscal policy, leading to less government borrowing in the near future. This is not happening at the moment.
Southeast Asia and AI
- There has been plenty written about the boom in data centers in the United States and China. Interestingly, however, Southeast Asia has become a major center of AI-related investments. In Malaysia, for example, investment in data centers now accounts for about 18% of GDP—a stunning number that may partly explain Malaysia’s 6% economic growth in the most recent quarter. Moreover, given Malaysia’s long experience in fabricating semiconductors, it is perhaps not surprising that exports are booming. On the other hand, data centers now use about 7% of the country’s electricity-generating capacity; this can potentially rise to 31% by 2035.
What about the rest of the region? In Indonesia, investment in information technology is accelerating, having nearly quadrupled from 2023 to 2025. For both Indonesia and Malaysia, much of the demand for the services from data centers appears to be coming from nearby Singapore, which is a major center of finance and biotechnology.
Thailand is also getting in on the game: It is not surprising that, in September, Thailand’s purchasing managers’ index for manufacturing was the highest of the 32 countries analyzed by S&P Global. There has been an acceleration in investment in data centers. In 2025 alone, investors sought permission to build digital projects valued at US$24 billion. Finally, Vietnam is also accelerating investment in data centers.
Burgeoning fiscal troubles in Europe as inflation accelerates
- Investors are selling French bonds and purchasing German ones: The spread between the yields on French and German bonds hit its highest level since 2012. While yields and spreads on Italian government bonds have also increased, it is France that is generating the most anxiety on the part of investors who are concerned about the state of France’s government finances, the inability of the legislature to find a resolution to the fiscal imbalance, and concerns about what might happen in next year’s presidential election.
France is by no means alone in dealing with these issues. Yet, it has become the poster child for such concerns. Although France is nowhere close to facing default risk, some analysts are comparing this situation to the eurozone debt crisis in 2012, when the so-called PIIGS nations (Portugal, Ireland, Italy, Greece, and Spain), all faced significant default risk due to unbalanced fiscal policy and soaring debt-servicing costs.
The crisis was only resolved when Mario Draghi, president of the European Central Bank, said that the ECB will do “whatever it takes” to save the euro. Then yields fell, countries reformed their finances, and the crisis dissipated. Today, Greece—which faced major fiscal challenges during the crisis in 2012—has lower borrowing costs than the United States.
The problem now is that crisis begets crisis. That is, the perception that a crisis is brewing has led investors to sell French bonds for the safety of German bonds. This, in turn, can exacerbate the difficulty in servicing French debt. What is needed is a credible plan by France to boost fiscal probity. Yet, given the divided and fragmented legislature, it is hard to see how this will happen anytime soon.
- The European Commission released data on inflation in the eurozone in September. It found that, in September, consumer prices were up 3.8% from a year earlier—the highest rate of inflation since September 2023. This largely reflected the 18.8% increase in energy prices versus a year earlier. Plus, energy prices were up 3.9% from the previous month. When volatile food and energy prices are excluded, core prices were up 2.5% in September from a year earlier, which was roughly in line with core inflation in recent months. Thus, it does not appear that energy-price inflation has had a serious impact on non-energy prices—at least not yet.
However, investors are concerned about rising inflation in Europe: They likely view elevated energy prices as here to stay. That suggests that energy prices may gradually seep into other prices, thereby boosting underlying inflation. As such, investors now expect the ECB to tighten monetary policy further. Plus, the sharp rise in energy prices is likely contributing to the rise in bond yields across Europe.
The inflation report found that, from a year earlier, consumer prices were up 3.3% in Germany, 3.4% in France, 4.1% in Italy, 5% in Spain, 3% in the Netherlands, and 4.6% in Belgium.
BY
Dr. Ira Kalish
Editorial and production: Arpan Saha and Aparna Prusty
Audience development: Kelly Cherry
Cover image by: Sofia Sergi
Knowledge services: Rohan Singh
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