Without further pressure from the White House, the Fed is set to cut rates in September. Markets are debating whether the move will be 25 or 50 basis points after weak payroll figures, though we continue to expect only a 25-bp cut given the persistent inflationary pressures. The prospect of lower rates has buoyed equities, while attention this week will turn to US inflation data for evidence of tariff-related effects.
Market recap
Beyond the numbers
Macroeconomics
Once again, US non-farm payrolls disappointed, coming in lower than expected at 22,000 (vs. 79,000 the previous month) and being weaker than JOLTS and ADP surveys suggested. Except for leisure & hospitality, major sectors such as business services, manufacturing, and construction have shown job destruction. Wage growth has slowed (3.7% y/y) and the unemployment ratio has increased to 4.3%.
Without any need for further political pressure from the White House, the Fed will cut key rates in September, with debate now focussing on whether this cut will be by 25 or 50 bps following weak payroll data; our scenario remains in favour of a 25-bp cut due to rising inflation pressures.
The global manufacturing PMI gained ground (from 49.7 to 50.9) on higher production and orders, but also on the back of renewed rebuilding of inventories and rising prices. PMIs were higher in the US and the eurozone but printed below 50 in the UK. PMI services were better oriented and above 50 in the US and the UK, but lagged behind in the eurozone. Prices and costs were on the rise again.
In other data, retail sales were firmer in the UK (0.6% m/m in July), whereas they declined in the eurozone (-0.5% m/m). Elsewhere, German orders fell further (-2.9% m/m in July), pointing to activity still being fragile. The eurozone inflation estimate for August settled at 2.1% y/y after 2.0% the previous month.
This week, the focus will shift to the European Central Bank’s (ECB) meeting, but no change in key rates (currently at 2%) is expected. US inflation should confirm its rising trend, with CPI for August expected to be closer to 3% y/y; PPI and core CPI are forecast to settle above the 3% y/y trend.
In France, Prime Minister Bayrou will probably lose the confidence vote in parliament and a new prime minister and government should be appointed over the coming weeks.
Asset allocation: strategic views as at September 2025
Equities
Global equities recorded modest gains last week (MSCI ACWI +0.5%), led by the ‘Magnificent 7’ (+2.2%). Alphabet surged (+10.1%) after a landmark court ruling, while Broadcom (+12.6%) boosted risk appetite with positive guidance, reinforcing the AI narrative. Rate-sensitive areas, such as US small caps (Russell 2000 +1.1%), also gained ground as weak US labour data cemented expectations for a September Fed rate cut. While the prospect of lower interest rates provides a short-term boost to equities as markets interpret bad news as good news, corporates will ultimately require trade policy and macroeconomic clarity to improve employment conditions. This week, markets will monitor US inflation data closely for signs of tariff impacts.
With two thirds of the Q3 reporting calendar completed, many corporates will begin providing updates before blackout periods start later this month. Commentary on resilient or weakening end-demand will shape Q3 earnings growth estimates (S&P 500 +7.5%, currently) and potentially sway market valuations (forward P/E 22.3x).
Alphabet and Broadcom surged, reinforcing the AI narrative
Fixed income
A weak US jobs report further solidified expectations for Federal Reserve rate cuts at the 17 September meeting, with markets pricing in 1.13 cuts (i.e. a full 25-bp cut is priced in and there is a 13% probability of a 50-bp one). US 10-year Treasury yields fell 16 bps to 4.07% following weak jobs numbers; this is the lowest it has been since the April 2025 ‘Liberation Day’ rate rally. Tariff-related price pressures raised inflation modestly, presenting the Fed with a dilemma: delaying cuts risks harming the labour market, while premature easing could intensify inflation. Lower rates lifted fixed income, with Treasuries, investment grade (IG), high yield (HY), and emerging market (EM) up 0.4%, 0.6%, 0.3%, and 0.9%, respectively. In Europe, German Bunds dipped by 6 bps, and French government bonds yields dropped by the same amount, leading to 0.2-0.3% on sovereigns / IG.
We revised the 10-year Treasury yield to a range of between 3.5–4.5% over 12–18 months
Forex & Commodities
Last week, the USD declined following weaker-than-expected non-farm payroll data. The EUR/USD rose above 1.17 and the USD/CHF fell to levels below 0.80. Markets moved to price in more than 25 bps in Fed rate cuts in the coming weeks, and this potential front-loading of rate cuts weighed on the greenback. This week’s US CPI data will not be market moving because the Fed’s focus has shifted to the labour market. The GBP weakened early last week, as long-end gilt yields rose to 5.80% and the UK government moved its forthcoming budget to late November.
This week’s ECB meeting will be a non-event for the EUR as the bank will keep rates on hold at 2%, giving a balanced assessment of the economy. There is a risk that the ECB’s inflation projections will rise which will limit any downside for the EUR.
Gold rose to new all-time highs last week to reach levels of USD 3,586 per oz. The upward move reflected increasing threats to the Federal Reserve’s independence and the prospect of imminent Fed rate cuts. The breakout above technical resistance levels of USD 3,500 per oz opens up the possibility of a move towards USD 3,750 per oz in the coming months, and we maintain a highly constructive stance.
This week’s ECB meeting will be a non-event for the EUR: the bank will keep rates on hold at 2%
The opinions expressed herein are correct as at 08 September 2025 and are subject to change without notice. This information should not be relied upon by the reader as research or investment advice regarding any particular fund, strategy or security. Past performance is not a guide to current or future results. Any forecast, projection or target, where provided, is indicative only and is not guaranteed in any way.
