2025 Weekly Update

Market update

The S&P 500 closed the week at 6,481.5, +0.33% higher. The Dow Jones closed at 45,400.86, -0.32%, with the Nasdaq higher by +1.14%. The volatility index VIX closed the week at 15.18, down from 15.36. The Euro Stoxx 600 fell -0.17%.

The 10-year UST closed at 4.07%, down from 4.23% a week before. The yield curve is upward sloping with the yield spread between the 3-month and 10-year UST at 6bps. US Corporate Bond spreads: Investment Grade spreads widened +1bp at 80bps and High Yield spreads widened +8bps at 344bps. German 10-year Bunds yield closed at 2.66% up from 2.72% a week before. In Europe, Corporate Investment Grade spreads remained unchanged at 95bps and High Yield widened +8bps at 310bps.

The US Dollar Index (DXY) remained unchanged last week and closed at 97.77. The Euro closed at 1.1717 (+0.27%); the Yen depreciated -0.26%, closing at 147.43 and the Swiss Franc appreciated +0.31%, closing at 0.798. Gold closed at $3,586.69, appreciating +4.02%. Oil was lower, Brent closed at $65.5 (-3.85%) and WTI at $61.87 (-3.34%).                                                                                                                                           

Macroeconomy

Jobs report

The August jobs report came in softer than expected. The Establishment survey headline number was quite soft at just +22k, below the forecast of +75k. A job gain in health care was partially offset by losses in federal government and in mining, quarrying, and oil and gas extraction. Manufacturing overall shed 12k jobs. Employment showed little change over the month in other major industries. The Establishment survey revisions were negative, down by 21k in total for June and July: June was revised from +14k to -13k and July went from +73k to +79k. The Household survey was more positive than the Establishment survey for Aug., showing a 288k jump in the number of employed people vs. July. The Household survey also revealed a 436k rise in the civilian labor force and a 10bps improvement in the participation rate at 62.3%. The workweek length was shorter than anticipated at 34.2 hours (below expectations at 34.3 hours). The unemployment rate ticked up 10bps m-o-m to 4.3% (in line with consensus). Hourly wage growth was inline on a sequential basis at +0.3% but cooled by more than anticipated on a y-o-y basis (+3.7% vs. +3.8% expectations and down from +3.9% in July). Weekly wage growth was just 3.4% y-o-y (due to the shorter workweek). The August report is the latest in a long string of data points signaling a cooling in US labor momentum (other examples this week include ADP, JOLTs, the employment report of both ISMs, Challenger, etc.). A simultaneous slowdown in both labor supply and demand has kept the unemployment rate broadly stable. Labor market indicators point to a loss of momentum. The US now has more unemployed people than job openings for the first time since April 2021. The Conference Board’s labor market differential has reached another cycle low, indicating upside risks to the unemployment rate.

Fedspeak

We heard different messages from Fed members. Some inflationary concerns were echoed by Cleveland Fed President Hammack, one of the hawks on the FOMC, who said that “inflation is still too high, and we’re trending in the wrong direction” and reiterated that she did not see the case for a September rate cut. Other members expressed concerns about the labor market. NY Fed President Williams said that concerns on the labor market have ticked up relative to ones on inflation and that it will "become appropriate" to cut interest rates "over time", though he did not comment on exact timing. Governor Waller, who voted for a rate cut at the most recent meeting, reiterated his expectation that the Fed should cut at the next meeting and favored multiple cuts over the next few months. In addition to the JOLTS release, his labor market concerns got some support from the Fed’s latest Beige Book which saw seven of the twelve Fed districts report that “firms were hesitant to hire workers because of weaker demand or uncertainty”. Separately, St Louis Fed President Musalem said he expected the labor market “to gradually cool and remain near full employment with risks tilted to the downside”. And Atlanta Fed President Bostic said that he still only favors one cut this year but suggested that September could be in play if economic data weakened from here.

Fed update

In other Fed subjects, last week we saw the Senate confirmation hearing for Stephen Miran to join the Fed’s Board of Governors, which is an important one given investor concerns about the Fed’s independence. In his testimony, Miran said that “If I’m confirmed to this role, I will act independently, as the Federal Reserve always does”. Miran was also questioned on his intention to take a leave of absence from, but keep his current CEA Chair role as he fills the rest of the Governor term expiring in January, though he said would resign from his CEA post if nominated for a longer term role at the Fed. Separately, we heard that the US Justice Department opened a criminal investigation into whether Fed Governor Lisa Cook committed mortgage fraud. That comes as we await to hear whether Cook will succeed in getting a temporary court order blocking her dismissal. Lastly, Treasury Secretary Scott Bessent confirmed the search for Powell’s successor as Fed Chair is already underway, with the WSJ reporting that he plans to start interviews on Friday. In comments to Reuters, he stressed that the Fed “should remain independent,” though he was quick to add that it has also “made a lot of mistakes”.

European inflation

Euro area headline inflation (flash estimate) rose to 2.1% y-o-y in August, up from 2.0% y-o-y in the previous month, while core inflation remained unchanged at 2.3% y-o-y in August. There were no major surprises in the details. The increase in headline inflation was primarily driven by energy base effects. Within core inflation, services inflation softened slightly to 3.1% from 3.2%, while core goods inflation was broadly unchanged at 0.8%. This was the last inflation print before the ECB’s meeting next week. The inflation data have been broadly in line with the ECB's June staff projections, reinforcing expectations that the ECB will keep its deposit rate steady at 2.0% next week.

Inflation in Switzerland

Swiss CPI inflation was broadly stable at 0.2% y-o-y in August. Core inflation softened slightly to 0.7% from 0.8%, mainly due to rent prices. August’s data represent the latest release before the Swiss National Bank (SNB) meeting on 25 September. The Q3 average inflation rate (0.2%) is slightly above the SNB’s conditional inflation forecast (0.1%), reducing the pressure on the central bank to ease monetary policy. The latest inflation prints, the SNB’s communication since June, and the hawkish shift by the ECB have all raised the bar for the SNB to cut rates into negative territory. Therefore, barring any sharp appreciation of the Swiss franc, analysts expect the SNB to remain on hold in September but to strike a dovish tone.

UK

Concerns about the fiscal outlook in the UK have risen again last week, driven by speculations of tax hikes and higher deficits ahead of the upcoming Autumn Budget (Nov. 26). The new projections will likely show the fiscal targets as being un-met (pre-measures), driven by spending cuts u-turn, US tariffs and lower trend growth, turning the headroom against its targets negative. Fiscal consolidations will likely be delivered to retrieve an appropriate level of headroom, likely through higher tax revenues as the prospect of spending cuts in the near-term are politically exhausted. At this stage, taxes hikes could impact more households directly, with a possibility of a full change in housing tax, implying a drag on growth. Until the official announcement, uncertainty will remain elevated, implying further volatility in the gilt market and sensitivity to global factors. The yield curve has steepened globally, particularly in the UK. Term premium continues to rise, driven by increasing fiscal risks. On the supply side, the Debt Management Office recently announced a higher allocation to short-term bond issuance driven by the elevated cost of issuing long-term bond. At the same time this week, markets saw the largest bond issuance from the DMO, issuing through syndication £14bn worth of gilts maturing in 2035. Overall demand remained strong, although it was compensated by foreign demand as only 60% was allocated to the domestic market.

Japan data

Japan nominal wages increased by +4.1% year-on-year (compared to +3.0% anticipated), representing the fastest growth in seven months during July, and an acceleration from a revised +3.1% rise in June. Real wages unexpectedly increased for the first time this year, rising by +0.5% year-on-year in July (against an expected -0.6%), contrasting with a revised -0.8% decline the previous month, thereby strengthening the case for the BOJ to consider a rate hike in the forthcoming months. Additionally, household spending rose by +1.4% year-on-year in July (versus +2.3% expected), compared to a +1.3% increase the prior month.

Highlights

On rates

Last week, government bond yields came down. That left 2yr US Treasury yields 10.8bps lower on the week, while 10yr yields fell by a larger 15.4bps to 4.08%, and 30yr yields by 16.9bps to 4.76%. Even so, long-dated yields across developed markets are currently near all-time highs. Unique circumstances for each case aside, most of these countries suffer from high and rising fiscal deficits, which leads to further bond issuance and higher borrowing costs — incentivizing long-term investors to demand higher yields today. In terms of short-term rates, the market is now pricing in more than 100% probability for a 25bps rate cut. While the Fed is now on a media blackout ahead of the next FOMC meeting on September 17, this week’s release of key PPI and CPI will shape pricing ahead of that, as these data will give more insight on anticipated tariff impacts - in addition to the weak job market. Looking at Europe, the ECB will meet on Thursday and is widely expected to keep its deposit rate unchanged at 2%. European bonds saw a more modest rally, with 10yr Bund yields down 6.2bps on the week to 2.66% while 10yr gilt yields fell 7.6bps to 4.65%. French OATs moved up to levels last seen in 2009 amid ongoing fiscal concerns, and the 30yr UK gilt yield reached its highest since May 1998.

Earnings

As the earnings season winds down, more than 99% of S&P 500 companies have reported Q2 2025 results. Of those, 81% reported positive EPS surprises and 81% reported positive revenue surprises. Around 300 S&P 500 companies mentioned artificial intelligence on their calls, making AI one of the highlights of this earnings season. The best-performing sector was Technology, with more than 80% of companies beating expectations, followed by Financials and Healthcare; the laggard was Materials, with roughly 50% missing expectations. Last week featured important software results, including Salesforce and Adobe. Looking ahead, Oracle’s earnings call on Tuesday will be this week’s most anticipated report.

What to watch

• Monday: US New York Fed 1-year Inflation Expectations; Germany Exports and July Industrial Production; France Confidence Vote; Japan Q2 Final GDP & Deflator; China Exports

• Tuesday: US NFIB Small Business Optimism; France Industrial Production; Taiwan Exports

• Wednesday: US PPI; China CPI and PPI

• Thursday: US CPI, Federal Budget Balance, Initial Jobless Claims; ECB policy Meeting; Japan PPI; Korea Exports

• Friday: US Univ. Michigan Consumer Survey; UK July GDP and Industrial Production; Japan Industrial Production; India CPI