Markets in a Minute – Fed Eases, BoE Holds, and Global Sentiment Shifts in September
Global investor sentiment continued to be shaped by both economic and political events as the third quarter of 2025 ended. The most notable catalyst came from the US Federal Reserve (Fed), which cut interest rates in September by 0.25%, to bring it to the 4.00%-4.25% range. This marked the first step in a new easing cycle and gave investors reassurance that policymakers are willing to support growth. US equities responded positively with major indices extending their gains throughout the month. However, sentiment turned more cautious towards the end of the month as Washington’s failure to agree new funding led to a federal government shutdown. This added to uncertainty and pushed demand back toward safter assets such as US government bonds.
Caution from the Bank of England (BoE), as the central bank holds interest rates amid stubborn inflation and labour market concerns
- The Monetary Policy Committee of the BoE, as expected, voted 7-2 in favour of leaving interest rates at 4.0%. Although, BoE Governor, Andrew Bailey, stated that he expects to return to the 2% inflation target, but also said “we’re not out of the woods yet, so any future cuts will need to be made more gradually and carefully.”
- Separately, Bailey stated in a hearing before a September Parliamentary Committee meeting that there was “considerably more doubt” to further interest rate cuts, citing an increase in inflation risk and concerns in labour market weakness.
- The UK’s annual inflation rate, as measured by the Consumer Prices Index (CPI), held steady at 3.8% in August 2025. This was expectedly unchanged from July and remains near the highs last seen in January 2024. On a monthly basis, the CPI rose 0.3%, following a 0.1% gain in July and matching forecasts. Annual core inflation eased to 3.6% from 3.8%, also matching forecasts.
A weakening US labour market forces the Federal Reserve’s hand in lowering interest rates
- Signs the US labour market was coming under more pressure was on show in September, with the most notable indicator being the Labor Department’s nonfarm payrolls report. It revealed that US employers added just 22,000 jobs in August, a sharp fall from July’s revised figure of 79,000 and well below estimates of 77,000. June’s report was also revised down from 14,000 jobs added to a loss of 13,000, the first negative reading since December 2020. US unemployment also increased to 4.3% in August, the highest since 2021.
- As widely expected, the Fed reduced interest rates by 0.25% to a range of 4.00%-4.25%, the first move since December 2024. Newly appointed Fed Governor, Stephen Mirran, was the only person to vote against the decision, instead favouring a larger 0.5% rate cut.
- This weakness in the US labour market appeared to be the main driver of the central bank’s decision to lower borrowing costs, with Federal Open Market Committee minutes acknowledging that downside risks to employment have risen.
- The US core personal consumption expenditures (PCE) price index – which excludes food and energy costs and is the Fed’s preferred measure of inflation – showed a 0.2% rise in prices from the prior month, in line with estimates and the revised reading for July. On a year-on-year basis, the index increased 2.9%, also in line with July.
Incoming Japanese economic data continues to build a case for policy normalisation from the Bank of Japan
- As expected, the Bank of Japan (BoJ) held interest rates steady at 0.5% in their September meeting. However, two policymakers voted against the decision – the first-time during Governor Kazuo Ueda’s tenure – instead, preferring a rate hike over holding rates steady. The BoJ continued to assert that it will raise interest rates if the economy and prices develop in line with its forecasts. The BoJ also unexpectedly announced it would start to sell its Exchange Traded Fund and Japanese real estate investment trust (J-REIT) holdings.
- In terms of the country’s economic growth, revised figures for Gross Domestic Product (GDP) over the second quarter of 2025 showed the economy expanded more than first thought, as GDP grew 2.2% on an annualised basis in the second quarter, outpacing initial estimates of 1.0% annualised growth. The upward revision was in part from a greater-than-anticipated rise in private consumption.
- Finally, Japan’s core CPI increased 2.7% year-on-year in August, in line with consensus expectations and down from 3.1% in July. Core inflation remaining above the BoJ’s 2% target supports the case for an interest rate hike and is the direction the central bank would like to take to bring it in line with other developed nation’s monetary policy.
The “risk on” mood continued across global markets in September, with the United States being a key market for equity returns. The first Fed rate cut of the year and comments around further cuts to come, from various sources, fuelled further optimism. Fed Chair, Jerome Powell, attempted to temper the exuberance and was saying in late-September that equities are “fairly highly valued.” However, it is Asian and emerging markets that continue to set the pace. Both areas have significantly outperformed global equity benchmarks year to date, with US dollar weakness providing a strong tailwind. For investors seeking long-term growth Asian and emerging markets can certainly offer an appealing alternative. Especially for those seeking diversification from US exposure and low growth across other developed economies.
Bond markets were largely flat in September. UK borrowing costs hit a 27-year high in September with the 30-year government bond (gilt) rising to 5.7%. However, despite volatility in the longer-dated bonds, the ten-year gilt was largely flat, starting the month yielding 4.72% and ending at 4.7%. After the US rate cut it was no surprise to see a hardening of prices in the US bond market with the ten-year treasury going from a yield of 4.23% to finish September at 4.15%. The ten-year Japanese Government Bond inched up marginally and offered approximately 1.64% by the end of the month.
Turning to commodities and gold continued the astonishing run seen in recent times. An ounce of gold hit new all-time highs again and closed the month with an ounce costing $3873 up from $3518 at the start of September. Political turbulence, concerns of ongoing dollar weakness and falling rates reducing the opportunity cost of holding the precious metal all providing momentum. Elsewhere the oil price was range bound, and a barrel of Brent crude ended a dollar down to close at $67.02.
If you would like to discuss how any of these developments impact investment portfolios, please do not hesitate to get in touch.