October Economic Observation of Europe and the US: Opportunities and Challenges Amid Divergent Monetary Policies​

As we step into the fourth quarter of 2025, the economies of Europe and the United States find themselves at a crossroads, torn between "policy decisions" and "mounting risks". Macroeconomic data and institutional research reports released in October reveal a deepening divergence in the monetary policy paths of the Federal Reserve (Fed) and the European Central Bank (ECB). Major asset classes have been disrupted by liquidity expectations, fiscal pressures, and geopolitical risks, resulting in a mixed market sentiment characterized by both "cautious optimism" and "risk alerts" regarding the economic outlook.​

In October, the "loose Fed, stable ECB" divergence has become a market consensus, with policy focus shifting from a "single inflation target" to a "balance between growth and inflation". After resuming interest rate cuts in September, the Fed maintained a "data-dependent easing" stance in October. Fed Chair Jerome Powell noted that "one-off inflation fluctuations" caused by tariffs could persist for several quarters, warning against the risk of such fluctuations evolving into long-term inflationary pressures. Institutions widely agree that October’s nonfarm payrolls and CPI data will be decisive: if weak employment coincides with falling inflation, another 25-basis-point rate cut may follow in November; however, a rebound in inflation driven by rising oil prices could prompt a pause in the rate-cutting cycle. A research report from Eastmoney.com points out that the market has already priced in "one more rate cut this year", but concerns over policy independence and the upcoming midterm elections may lead the Fed to adopt a more cautious approach.​

In contrast, the ECB is widely expected to "keep policy unchanged" in October. Since July, euro zone inflation has stabilized at the 2% target for four consecutive months, while the unemployment rate remains low. The economy’s resilience against trade shocks has provided a solid foundation for policy stability. Nevertheless, institutions have flagged two potential disruptions: first, rising political tensions in France and the appreciation of the euro may weigh on inflation, creating pressure for policy easing; second, the upcoming European fiscal stimulus package could push up inflation expectations, limiting the ECB’s room for rate cuts. Most institutions predict that the ECB will not adjust interest rates in October, with the probability of a rate cut this year standing at only 30%. Any policy shift is likely to wait for clear data signals in early 2026.​

In October, the trading logic for major assets in Europe and the US shifted from "policy expectation-driven" to "fundamental verification", leading to divergent trends across sectors. After being led higher by tech stocks in the third quarter, US stocks faced dual tests in October: "earnings validation" and "marginal changes in liquidity". While the growth momentum of the AI industry and increased purchases of US Treasuries by allied countries remain intact, weakened expectations of Fed rate cuts could trigger adjustments in the stock market. Institutions emphasize that the October-November earnings season will be critical: if AI companies deliver better-than-expected earnings, tech stocks may continue their strong performance; otherwise, capital may shift to cyclical sectors that benefit from inflation. European stocks, meanwhile, showed stronger defensive traits: the consumer sector was supported by stable employment and wage growth, while the financial sector benefited from wider interest margins amid high interest rates, making both sectors top recommendations by institutions in October.​

The US Treasury market grappled with a "supply surge and weak demand" dilemma in October. To fill the fiscal gap, the US Treasury Department plans to increase long-term bond issuances in the fourth quarter, while expectations of economic weakness have dampened demand for such bonds. Eastmoney.com warned that a shift in short-term funds due to rising long-term risk premiums could trigger a liquidity shock, widening the spread between 10-year and 2-year US Treasuries. The euro zone bond market, however, remained relatively stable: ECB policies and economic resilience supported demand, though the rising debt ratios of southern European countries such as Italy continued to pose a latent risk.​

In the foreign exchange market, the US dollar index is expected to fluctuate weakly within the 95-102 range in October. Fed rate cuts have opened the door to narrowing interest rate differentials, and combined with expectations of a slowing US economy, this has weighed on the dollar’s performance. However, institutions stress that an unexpected strong nonfarm payrolls report or escalating geopolitical risks could trigger a short-term rebound in the dollar. The euro against the US dollar exhibited "limited support from a weak recovery": while the euro zone’s economic resilience exceeded expectations, slow implementation of fiscal stimulus and weak exports restricted the euro’s appreciation potential. It is expected to fluctuate within the narrow range of 1.08-1.12 in October.​

Beneath the optimistic expectations for the European and US economies in October, three major risks linger. First, US Treasury liquidity risk: the "Big and Beautiful Act" passed in July raised the debt ceiling by ​

5trillion.Theincreaseinshorttermbondsupplyinthefourthquarter,coupledwiththehighinterestratesensitivityofshorttermfunds,couldleadtoarepeatoftheliquiditycrunchseeninthethirdquarterof2023ifratecutexpectationsarereviseddownward.Second,stagflationrisk:theescalationoftheRussiaUkraineconflictandtensionsintheMiddleEasthavepushedupoilprices.TheUSfacespressuresfromrisinginflation,worseningfiscalconditions,andeconomicweakness,whiletheeurozonesindustrialresiliencehasbeenunderminedbyhigherenergyimportcosts.InstitutionsestimatethatifBrentcrudeoilpricesbreakthrough

95 per barrel, US CPI could rise above 3%. Third, policy uncertainty: with US midterm elections approaching, the Trump administration may shift its focus to fiscal expansion, but the scale and pace of such expansion remain uncertain; in the euro zone, differences among countries regarding the intensity of stimulus policies may reduce the effectiveness of such measures.​

Overall, the European and US economies in October were marked by "divergent policies, asset rotation, and latent risks": the Fed leans toward easing but has slowed its pace, while the ECB maintains stability; stock markets face sector rotation, and bond markets and exchange rates fluctuate; US Treasury liquidity, stagflation, and policy uncertainty are the core risks. Investors should adopt a "balanced allocation + risk hedging" strategy, seize opportunities in inflation-linked and defensive sectors, and use assets such as gold to hedge against geopolitical and liquidity risks. For in-depth analysis of specific sub-sectors, additional specialized insights can be provided.