2025 Weekly Update

Market update

The S&P 500 closed the week at 6,466.91, +0.27% higher. The Dow Jones closed at 45,631.74, +1.53%, with the Nasdaq lower by -0.58%. The volatility index VIX closed the week at 14.22, down from 15.09. The Euro Stoxx 600 rose +1.40%. 

The 10-year UST closed at 4.25%, down from 4.32% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 6 bps. US Corporate Bond spreads: Investment Grade spreads remained at 78bps and High Yield spreads widened +6bps at 346bps. German 10-year Bunds yield closed at 2.72% down from 2.79% a week before. In Europe, Corporate Investment Grade spreads widened +3bps at 92bps and High Yield widened +3bps at 291bps.

The US Dollar Index (DXY) depreciated -0.14% last week and closed at 97.72. The Euro closed at 1.1718 (+0.13%); the Yen appreciated +0.17%, closing at 146.94 and the Swiss Franc appreciated +0.66%, closing at 0.8015. Gold closed at $3,371.86, appreciating +1.07%. Oil was higher, Brent closed at $67.73 (+2.85%) and WTI at $63.66 (+1.37%).

Macroeconomy

Powell at Jackson Hole

Investors were expecting a more hawkish message from Fed Chair Powell. Instead, he acknowledged the weakening in labor fundamentals and while noting that inflation is seeing upward pressure from tariffs, he still thinks a “reasonable base case” is that this will be “short lived”. As downside risks to the jobs outlook rise, Powell feels that it may be appropriate to adjust the Fed’s policy stance (this is about as explicit a “we’ll probably cut in Sept”-type statement was one can expect from the Fed chair). Powell's assessment of the labor market shifted after the latest NFP report. He's not taking comfort in a stable unemployment rate when labor supply and demand are both falling. "Overall, while the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers. This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment". Lastly, the framework review was in line with expectations. They removed the reference to the zero lower bound, returned to a framework of flexible inflation targeting and eliminated the "makeup" strategy (flexible AVERAGE inflation targeting), made the employment goal symmetric (instead of focusing only on high unemployment), and reaffirmed the 2% inflation target.

Fed’s structure

Fed Governor Lisa Cook was recommended for immediate dismissal by the Department of Justice as allegations of mortgage fraud required further investigation. If, for any reason, Cook is replaced by an appointee from President Trump, then those would then constitute the majority. This raises the risk of the Federal Reserve’s structure being weakened. As a reminder, monetary policy is set by the FOMC, which is made up of twelve people: the seven members of the Fed’s Board of Governors, the president of the NY Fed and an annually rotating group of four of the 11 remaining regional reserve bank presidents. The Board of Governors is responsible for approving or vetoing the reappointment of reserve bank presidents every five years. It’s also responsible for bank regulation.

US PMIs

The flash US PMIs for August exceeded expectations, with the manufacturing index (53.3 vs 49.7 expected) rebounding to its highest level since May 2022, while services (55.4 vs 54.2 exp, 55.7 prev.) was resilient at strong levels. The details were also on the hawkish side, with the employment component edging up to its highest since January and the composite output price index rising to 59.3, its highest in three years. Other data was a bit more mixed, with existing home sales rising in July (+4.01m vs +3.92m exp.) but initial and continuing jobless claims moving higher, with initial claims up to +235k in the week ending August 16 (+225k exp).

EU PMIs

Euro area Flash Composite PMI rose by 0.2 points to 51.1 in August, exceeding consensus expectations (50.6). The increase in the headline PMI was driven by manufacturing output (+1.7 points to 52.3), while activity in the services sector softened somewhat (-0.3 points to 50.7). The trade agreement between the EU and the US has likely helped to ease business uncertainty. PMI figures are consistent with a scenario of modest growth in Q3 across the euro area as a whole. Regarding monetary policy, PMIs will strengthen the case for hawks to keep rates unchanged for the foreseeable future.

UK data

Prices in the UK continue to rise at a strong pace, with headline CPI edging up to 3.8% year-on-year (+0.2%), above consensus but in line with the BoE’s latest forecast. This was driven by increases in food, services, and energy prices, as core CPI also rose to 3.8%. On the other hand, core goods edged down. Services CPI rose to 5.0%, driven by higher airfares and hotel prices. The BoE’s measure of supercore inflation, which excludes these volatile components, edged down in July. In addition, rental prices slowed notably. However, given the Bank’s concerns about overall price pressures, particularly regarding headline and food inflation, there is a risk of a longer pause than expected before the next rate cut. UK flash PMI surprised to the upside in August, rising to 53. The main driver was an expansion in the services sector, mainly due to new business activity from abroad. Although there are some positive aspects in this report for the private sector, the details highlight the fragility of the demand environment. The manufacturing sector continues to slow, driven by another sharp contraction in both domestic and international new orders. Cost burdens for businesses remain high, as input prices edged slightly higher. However, output prices remained unchanged, while the labor market continues to contract, reflecting the ongoing difficulty in passing through higher costs.

Japan data

Japan’s consumer inflation saw a slight moderation but stayed well above the BOJ’s 2% target in July. Headline CPI eased from +3.3% to +3.1% y-o-y, in line with expectations, but the core (ex-fresh food) CPI was a touch above expectations of (+3.1% vs +3.0% exp). The core-core CPI reading that excludes both fresh food and energy prices remained steady at +3.4% y/y in July, suggesting still sticky underlying inflation momentum. Money markets are pricing a 53% chance of a rate hike from the BoJ over the next two meetings, while 10yr JGB yields are at 1.62%, a new post-2008 high.

Highlights

On rates

US Treasury yields declined across the curve as investors priced in a higher probability of rate cuts. Sovereign bonds initially suffered during the week on the back of stronger than expected economic data, but yields dropped on Friday following Powell’s dovish comments at the Jackson Hole symposium. The yield on 10yr Treasuries ended the week at 4.25%, down -6.4bps (-7.4bps on Friday), while the 2yr closed the week -5.5bps lower (-9.7bps on Friday) at 3.7%. Fed expectations moved in a dovish direction with funds futures now implying an 85% probability of a rate cut at the September meeting, up from 81% before Powell spoke. 54bps worth of rate cuts are priced in over the course of the year’s final three meetings. In Europe, sovereign bonds rallied. 10yr bund yields closed the week at 2.72%, down -6.7bps, while gilts were slightly lower, down -0.3bps. Elsewhere, 10yr JGB yields reached a post-2008 high on Friday, despite Governor Ueda’s remarks which reinforced market expectations that Japan’s central bank may resume its rate hiking cycle later this year given accelerating wage growth.

Earnings

The better-than-expected Q2 earnings season has helped propel US earnings revisions to their highest level in 4 years at the start of August. However, since then revisions have fallen back to flat. While this is not unusual in August, it likely signals that there are no new EPS catalysts ahead for stocks in the short-term. The one exception globally appears to be in Japan where earnings revisions here have been accelerating over the last few weeks. Earnings this week will focus on Nvidia, CrowdStrike, Dell, Marvell and Snowflake from the US. In China, the spotlight will be on and PDD, Meituan, Alibaba, and BYD.

What to watch

• Monday: US New Home Sales; Germany IFO
• Tuesday: US Durable Goods Orders, Conference Board Consumer Confidence; HK July Exports
• Wednesday: US Mortgage Applications; Germany Retail Sales; Australia CPI; China Industrial Profits
• Thursday: US Q2 GDP; Initial Jobless Claims; SwitzerlandQ2 GDP
• Friday: US PCE; Canada Q2 GDP; ECB CPI Expectations; Japan CPI