Week ended Sept 12, 2025: FOMC rate cut coming

It is getting increasingly difficult to write this update each week – or at least offer anything substantive – because investors continue to ignore any and all news that might shatter sentiment.  The upper trajectory in stocks and the downward trajectory in credit spreads goes on and on, week after week, regardless of the economic and geopolitical news.  I suppose one way to look at this is that good news is amplified far more than bad news.  For example, CPI for August came in as expected but still is showing no progress, with headline and core CPI stuck well above the Fed’s target of 2%/annum (headline CPI at 2.9%/annum YoY to August, core CPI at 3.1%/annum YoY to August, BLS report here). 

Although this might give the Fed pause as far as pivoting to an easing stance, it is unlikely as the other side of the Fed’s twin mandate – maximum employment – is clearly under stress.  Firstly,  new job creation for the past year was reduced by 911,000 (BLSreport here), which was at the top end of analysts’ consensus expectations ranging from 600,000 to 1 million.  Secondly, first time claims on Thursday for the prior week rose to 263,000, the highest since October 2021.

The icing on the cake is the continued erosion in consumer confidence according to the University of Michigan Surveys of Consumers released on Friday.  The graph to the left shows that consumer confidence is the lowest since May, and is 21% worse than it was one year ago.  The link here shows the history of consumer sentiment by political party, and I would suggest that you focus on the trends across both parties and independents, and most importantly the level for (non-partisan) independents.

Lastly, concerns about the U.S. economic outlook are amplified by the geopolitical overlay, which – at least in my opinion – is worsening by the day.  Israel undertook a bold attack on Hamas members in Doho early in the week, Russia has said its talks with Ukraine (what talks?) are “on hold”, and conservative activist Charlie Kirk was assassinated on a university campus.  All have invoked rather strange comments from the Trump Administration ranging from indifference to anger.  In particular, the threatened retribution of Mr Trump on the “liberal left” because of the assassination of Mr Kirk only further encourages more division and inflames emotions, not what America needs at the moment given its polarisation.   

In Europe, the ECB held rates at its Monetary Policy meeting on Thursday and looks to be done with its easing cycle for the time being.  French president Macron named a new Prime Minister – Sébastien Lecornu – following a no-confidence vote for the former PM in the General Assembly early in the week.  UK Prime Minister Keir Starmer, whose Labour government looks increasingly in trouble, sacked UK Ambassador to the US Peter Mandelson due to revelations about his ties to Jeffrey Epstien two decades ago.  This follows the resignation of deputy PM Angela Rayner the week before.  Both France and the UK are facing severe budget constraints, with investors focused on how both countries might be able to repair their broken finances.  Japan’s PM Shigeru Ishiba also announced his resignation early in the week, after serving just one year. 

The long-anticipated FOMC meeting is this week, at which the Fed is expected to reduce the Federal Funds rate by 25bps.  Two additional 25bps reductions in the Fed Funds rates are expected at the final two FOMC meetings this year, according to the CME FedWatch Tool.  

MARKETS

• Stocks this past week were better across the board, led globally by emerging markets and Japanese stocks. Emerging markets stocks remain the best performers year-to-date globally. 

• In the US, the S&P 500 and the DJIA both closed at record highs on Thursday before declining off their highs in a muted session on Friday.  However, the NASDAQ Composite closed at a record high on Friday to end the week, as tech stocks continue to surge. 

• UST yields were higher at the short end of the curve (with the FOMC rate cut already priced in), and lower at the long end of the curve, leading to nice gains on the week for long duration investors. 

• Both investment grade and high yield bonds experienced lower yields and tighter credit spreads on the week, another sign of the insatiable appetite of risk investors at the moment. 

• Gold also reached another record high, driven by a number of factors aside from general concerns about market risk. 

As I mentioned earlier, it is hard to explain the ongoing rally in risk assets aside from the combination of momentum and retail investors piling into risky assets week after week irrespective of the outlook. This will certainly not last forever, but it is the environment we find ourselves in at the moment.

Below are updated tables for the end of the week.

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