With Fed chairman Jerome Powell opening the door to a rate cut in September, last week’s Jackson Hole symposium reinforced our forecast of two reductions this year. Global equities closed on a positive note, buoyed by the policy easing. However, the impact of tariffs must be fully assessed over the coming weeks.
Market recap
Beyond the numbers
Macroeconomics
Powell mentioned at Jackson Hole that the balance of risks had shifted: downside risks on employment have increased, while inflation is expected to slowly trend higher, but inflation expectations remain anchored. He indicated that the Fed’s policy would be adjusted, paving the way for a rate cut in September. While he did not mention specific figures, our scenario anticipates a 25-basis-point cut in September and another one in December.
In July, inflation in the UK reached 3.8% y/y, driven by higher prices in the transport and leisure sectors. It is expected to peak at around 4% in the coming months, which reduces the likelihood of a rate cut by the Bank of England.
Meanwhile, inflation in the eurozone remained stable in July, rising by 2.0% y/y and 2.3% y/y on core data. Inflation is expected to remain at around 2.0% over the coming months, which should lead the European Central Bank (ECB) to hold its current interest rate steady.
Headline inflation in Japan fell from 3.3% to 3.1% y/y, but core inflation remained at 3.4%, thus maintaining pressure on the Bank of Japan (BoJ) to further normalise its policy.
Flash estimates of the manufacturing PMI were better than expected, reflecting a relief rally in the US and the eurozone following the striking of trade agreements. Sentiment improved in terms of production and new orders, but inventories continued to build and prices rose due to tariffs being passed on to end customers. The services PMI remained strong in the US and the UK but eroded in the eurozone.
The most important data this week will be the second estimate of US Q2 GDP and the July core PCE index, which is expected to rise to nearly 3% y/y.
Asset allocation: strategic views as at August 2025
Equities
Global equities ended last week in positive territory (MSCI ACWI total return +0.4%), driven by a strong rally on Friday (+1.4%) that reversed the losses incurred from Monday to Thursday (-1.0%).
Investors reshuffled risk ahead of Fed Chair Jerome Powell’s comments, leading to profit-taking in the technology sector (-1.6%, ‘Magnificent 7’ -1.0%) and a rotation into defensive sectors. As a result, US equities lagged behind (S&P 500 +0.3%, Nasdaq -0.6%). The Fed’s dovish commentary reignited risk appetite, which benefited economically and rate-sensitive areas like US small caps (Russell 2000 +3.3%), and broadened market performance (S&P 500 Equal Weighted +2.0%).
With corporate earnings season behind us, attention now turns to the US economy for signs of a slowdown as tariff impacts emerge. Nvidia’s upcoming results could influence whether the technology/AI trade regains momentum, while European equities, which were among last week’s top performers (+1.4%), may make further gains if a Russia–Ukraine ceasefire is announced.
With corporate earnings season behind us, attention now turns to the US economy
Fixed income
Powell’s Jackson Hole speech on 22 August signalled imminent rate cuts, driving US rates sharply lower; the 10-year Treasury yield dropped 10 bps intraday, closing the week down 7 bps, while the 2-year yield fell 10 bps to 3.70%. Year- to-date, the US 10-year yield is down 31 bps, contrasting with 10-year German Bunds, which were up 38 bps. The rate declines over the week naturally boosted fixed income returns: Treasuries, investment grade (IG) and high yield (HY) were all up 0.3%.
We should like to take this opportunity to highlight our positive view on agency MBS (5/5). This was a position entered into in late 2024 to diversify investment- grade core holdings amid abnormally high MBS spreads versus historical IG lows. While spreads remain wide, the attractive carry and high-coupon positioning are proving rewarding, as current-coupon MBS continue to offer superior yields and ratings compared with pure IG, while having performed in line so far this year. Importantly, on the back of the Trump administration’s push to exit Fannie Mae and Freddie Mac from conservatorship, the administration clarified that agency MBS will keep the implicit guarantee of the US government – a clear positive.
MBS continue offering superior yields and ratings compared with pure IG
Forex & Commodities
Last week, the USD weakened following comments from Federal Reserve Chair Powell, which indicated that the Fed may cut rates as soon as September. Overnight index swaps (OIS) moved to price in a terminal rate of around 3% by Q2 2026. The main event this week will be the publication of PCE and personal income data. Much of the news has been priced in, suggesting a modest consolidation for the USD over the coming week.
The EUR was stable following much better-than-expected PMI data, which limit the scope for continued ECB easing. The EUR should remain stable over the coming week, with few important data releases.
The JPY was largely unchanged, despite still-elevated inflation readings for July. Markets moved to price in an October BoJ rate hike with a 51% probability. The JPY continues to trade at generally weak levels, and we see no immediate catalyst to change this dynamic.
Gold rose to levels of around USD 3,370 per oz following Powell’s comments. Gold has scope to outperform on any pronounced rate-cutting cycle, which will reduce the US real rate profile materially. We remain constructive on gold over the medium term.
Gold has scope to outperform on any pronounced rate-cutting cycle
The opinions expressed herein are correct as at 25 August 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.
