The global economy is awash in liquidity, which often has a frothy effect on asset prices. For example, Chinese equities have rallied strongly even as the economy shows signs of slowing down; investors are apparently optimistic that China’s strength in key technologies will pay off for them. Similarly, the yield on the one-year deposit rate offered by commercial banks is currently only about 1%, which is very low. Investors thus may be shifting money from savings products to equities, which are attractive due to their relatively high price/earning ratios.
Meanwhile, inflation is accelerating. This is likely the result of a combination of factors, including tariffs, rising labor costs related to immigration policies, and supply-chain disruptions. Increasingly, the gap between the benchmark interest rates of the European Central Bank and the Federal Reserve is narrowing.