2025 Weekly Update

Market update

The S&P 500 closed the week at 6,584.29, +1.59% higher. The Dow Jones closed at 45,834.22, +0.95%, with the Nasdaq higher by +2.03%. The volatility index VIX closed the week at 14.76, down from 15.18. The Euro Stoxx 600 rose +1.03%.

The 10-year UST closed at 4.06%, down from 4.07% a week before. The yield curve is slightly upward sloping with the yield spread between the 3-month and 10-year UST at 3bps. US Corporate Bond spreads: Investment Grade spreads narrowed -1bp at 79bps and High Yield spreads narrowed -5bps at 339bps. German 10-year Bunds yield closed at 2.71% up from 2.66% a week before. In Europe, Corporate Investment Grade spreads narrowed -4bps at 91bps and High Yield narrowed -4bps at 306bps.

The US Dollar Index (DXY) depreciated -0.22% last week and closed at 97.55. The Euro closed at 1.1734 (+0.15%); the Yen depreciated -0.17%, closing at 147.68 and the Swiss Franc appreciated +0.18%, closing at 0.7966. Gold closed at $3,643.14, appreciating +1.57%. Oil was higher, Brent closed at $66.99 (+2.27%) and WTI at $62.69 (+1.33%).                                                                                                                                           

Macroeconomy

US prices

The August CPI report showed headline inflation rising by +0.4% m-o-m, up from +0.2% in July and above the +0.3% forecast. Core inflation matched expectations at +0.3% m-o-m, unchanged from July but it did come in at 0.345%, just shy of rounding up. However, it was outsized increases in volatile categories such as airfares (+5.8% m-o-m) and lodging (+2.3% m-o-m) that pushed the core reading higher, with the Cleveland Fed’s trimmed mean CPI measure rising by a more moderate +0.26% m-o-m. So, it showed continued evidence of tariff pass through, but pointing to a gradual transmission rather than an accelerated step up. A rise in core goods inflation has so far been offset by a decline in shelter. Supercore services have stabilized. On the producers’ side, US PPI showed headline producer prices falling by -0.1% in August (vs. +0.3% expected). The previous month’s reading for July also got revised down from +0.9% to +0.7%. The latest print and the revisions pushed the y-o-y PPI reading back to +2.6% (vs. +3.3% expected), a clear reduction from the start of the year, when it peaked at +3.8% in January. Lastly, the NY Fed 1-yr inflation expectation series inched up from 3.1% to 3.2%.

US jobs

The Bureau of Labor Statistics announced some sizeable negative revisions to payrolls. The headline was that total payrolls were revised down by -911k in March 2025, meaning that the labor market was in a weaker state than we previously thought. Smoothing that adjustment over the year, it means that the payroll numbers over April 2024 to March 2025 were around 75k lower each month than announced. So, this cycle didn't ultimately reach the second longest payroll expansion in history thought. In fact, it's now in 5th place behind the runs that ended in 1979, 1990, 2007 and 2020. Initial jobless claims for the week ending 6 Sept. rose to +263k, well above the +235k expected. The state of Texas accounted for most of this increase so some of this spike was likely due to temporary distortions. The NY Fed 1-yr consumer expectation series showed that expectations of finding a new job fell to its lowest reading since that series began back in 2013. Still, both were yet another data point adding to a picture of a softening US labor market.

US consumer

The University of Michigan sentiment report was downbeat. Headline sentiment fell to 55.4 (down from 58.2 in Aug. and below the consensus forecast of 58; which is not far from the Apr. low of 52.2) while Expectations sank to 51.8 (down from 55.9 in Aug and below the consensus forecast of 56.2; again, not far from the Apr. low of 47.3). According to the report, this month’s easing in economic views was particularly strong among lower and middle-income consumers: “consumers continue to note multiple vulnerabilities in the economy, with rising risks to business conditions, labor markets, and inflation”. On the inflation front, 1-year expectations were flat m-o-m at 4.8% while 5-10-year rose 40bps to +3.9% (up from +3.5% in Aug.). The report is consistent with the stagflationary signals seen across US data.

FOMC preview

Investors expect the Federal Open Market Committee (FOMC) to cut by 25bps. Powell’s term as Chair still goes up until May, but there was progress on Trump’s nominee for the Fed Board of Governors, Stephen Miran, who currently is the chair of the Council of Economic Advisors. Miran’s nomination was approved by the Senate Banking Committee last week. A full Senate vote is possible as soon as Monday, which could then allow Miran to take part in the FOMC meeting this week. Meanwhile, the US Justice Department launched an appeal to the federal appeals court against Tuesday’s court decision that temporarily blocked Trump from removing Fed Governor Lisa Cook. So, both are likely to attend. Miran may dissent in favor of a 50bps cut, whole votes from Waller and Bowman remain a close call. In terms of the dots plot, the median 2025 dot is likely to show two cuts, with a risk of three. The average projection should fall, and the median 2026 and 2027 dots are expected to move lower. The Summary of Economic Projections (SEP) can remain broadly unchanged, though downside risks to GDP and upside risks to the unemployment rate persist. Powell is expected to leave the door open to consecutive cuts without committing to a specific path, he will emphasize that the pace will be data dependent. All in all, since Fed officials seem willing to look through hot inflation for a few months (based on the view that tariffs will only have a transitory effect on prices), the focus should be on the deteriorating growth/sentiment/labor figures (which have dovish policy implications).

Other central banks

The Bank of Canada is also meeting on Wednesday with the BoE and Norges Bank on Thursday, and the BoJ on Friday being the other main ones deciding on rates. Markets are pricing in an 85% probability of a Canadian cut, a 61% of a Norwegian one but minuscule probabilities of a change in Japan or the UK. There should be 16 global central banks deciding on rates this week with Brazil and Indonesia on Wednesday the largest of the rest, with markets expecting both to stay on hold.

ECB decision

As widely expected, the European Central Bank (ECB) left interest rates unchanged for the second consecutive meeting. The press statement was broadly unchanged, with the Governing Council committed to a “data-dependent and meeting-by-meeting approach”. Staff projections continue to be (very) dovish though, with inflation undershooting the target in both 2026 and 2027. Core inflation is now projected to be 1.8% in 2027 (down from 1.9% in June), and headline inflation 1.9% in 2027 (down from 2.0%). Meanwhile, GDP growth was revised up to 1.2% in 2025 from 0.9%. Risks to growth have become “more balanced” due to the trade deal. The ECB expects higher public spending to contribute to growth, while geopolitical tensions remain a source of uncertainty. The outlook for inflation remains “more uncertain than usual” due to trade uncertainty. In the Q&A session, President Lagarde mentioned that the “disinflationary process is over”—a rather bold statement—and that “we continue to be in a good place, inflation is where we wanted it to be”, adding that “we are not on a pre-determined path”. In all, the hawks seem to have taken control. Despite inflation undershooting the target over the medium term, the bar for future rate cuts remains high for the ECB. In other words, growth or inflation would need to surprise materially to the downside for the ECB to cut rates further.

China data

Aug. Retail sales expanded by a modest +3.4% y-o-y, falling short of the +3.8% forecast and declining from July +3.7% increase, signaling persistent weakness in domestic demand. Similarly, industrial output growth softened to +5.2% in Aug., down from +5.7% in July and reaching its lowest point since Aug. 2024. Year-to-date fixed-asset investment saw a significant slowdown, growing by just +0.5% compared to +1.6% in the January-July period, and missing economists' +1.5% projection. Consumer prices fell more than anticipated in Aug., while deflation in wholesale prices continued, as calls intensified for Beijing to enhance measures to stimulate sluggish domestic demand and mitigate the decline in export growth. The CPI decreased by -0.4% y-o-y in Aug. (compared to the -0.2% expected), primarily due to a high base effect and weaker-than-normal seasonal increases in food prices. The PPI dropped by -2.9% y-o-y in Aug., improving from July’s -3.6% decline. This narrowing marks the first improvement since March and indicates stronger industrial demand following government initiatives to support growth.

Highlights

On rates

Last week, government bonds showed mixed moves across maturities as short-term yields rose while intermediate and long-term yields fell. The 2yr yield rose +4.8bps, after briefly hitting its lowest level in 3 years on Monday, while 10yr yields were down -0.9bps to 4.07% and 30yr yields fell by -7.8bps. Moves followed a heavy week of data releases with weaker labor data and firmer inflation and further strengthened the narrative for Fed easing. This led the market to continue in the same vein as last week, pricing a 25bps cut ahead of this week’s FOMC meeting. Further rate cuts are forecast, with two (and a risk of three) further cuts probable by year-end, while trends are subject to the evolving Fed Board of Governors composition. On the European side, German Bunds suffered a sell-off with the 2yr Bund yields rising 8.9bps and 10yr yields up 5.3bps to 2.71%. On Friday, Fitch downgraded France’s OAT from AA- to A+ with a stable outlook - the first time in history France has been rated in the single-A category. France’s rating move was in line with the market’s pricing, while sovereign borrowing cost is now higher than for some other national prominent companies. At the same time, the agency upgraded Portugal from A- to A, while S&P upgraded Spain from A to A+, all with stable outlooks.

What to watch

• Monday: US Empire Manufacturing; China August Macro; India Exports
• Tuesday: US Retail Sales; Canada CPI; UK Labor Earnings; Germany ZEW Survey; Europe Industrial Production
• Wednesday: US FOMC; US Housing Starts; Bank of Canada Rate Decision; UK CPI; Eurozone CPI; Japan Exports
• Thursday: US Initial Jobless Claims; Bank of England and Norway's Rate Decisions; Australia Employment; New Zealand 2Q GDP
• Friday: UK Retail Sales; Bank of Japan Rate Decision; Japan's CPI