Markets in a Minute: Inflation Returns to the Spotlight as Markets Navigate Uncertainty
September was dominated by renewed inflation and interest-rate concerns as continued disruption in the Middle East pushed energy prices higher and increased costs for households and businesses. Oil moved back above $100 a barrel during the month, contributing to a further rise in inflation across several major developed economies. Central banks responded with a more restrictive tone, with interest rate rises in the US, euro area and Japan, while the Bank of England held rates but saw three policymakers vote for an increase. Despite these pressures, economic activity remained relatively resilient, particularly in the US, where continued investment linked to artificial intelligence supported growth. The result was a challenging month for government bonds and a more mixed environment for global equities.
Middle East disruption keeps energy prices elevated
- Renewed disruption across the Middle East remained one of the dominant market drivers during September, with concerns around energy infrastructure and shipping through the Strait of Hormuz pushing oil back above $100 a barrel.
- Brent crude ended the month at just over $103 a barrel, around $13 higher over September, increasing pressure on transport, manufacturing and household energy costs.
- Continued uncertainty around energy supply also increased volatility across financial markets, with investors increasingly assessing whether the shock could prove more persistent than previously expected.
Inflation pressures build again
- Inflation remained above central-bank targets across major developed economies, with annual inflation at 3.4% in the US, 3.1% in the UK and 3.2% in the euro area in August. Energy prices were an important contributor to the increase.
- Business surveys also pointed to renewed cost pressures, with firms reporting higher energy, transport and wage costs alongside continued supply-chain disruption.
- The combination of resilient economic activity and renewed price pressures reduced expectations that central banks would be able to lower interest rates quickly.
Central banks shift back towards tighter policy
- The US Federal Reserve raised interest rates by 0.25 percentage points to 3.75%–4.00%, its first increase since 2023, as policymakers responded to stronger activity and persistent inflation.
- The European Central Bank also increased its deposit rate by 0.25 percentage points to 2.50%, while the Bank of Japan raised its policy rate to 1.25%, continuing the gradual removal of its previously very loose monetary policy.
- The Bank of England kept Bank Rate at 3.75%, although the 6–3 vote showed increasing concern around inflation, with three policymakers preferring an immediate rise to 4%.
Global growth remains surprisingly resilient
- September’s business surveys continued to point towards stronger global activity, with the G4 Composite Output Index rising to 55.7 from 54.3, its highest level since March 2022.
- The US remained the clearest source of strength, with its Composite PMI rising to 58.4, while activity also remained in expansionary territory in the euro area, UK and Japan.
- The picture remained more uneven in Asia. AI and semiconductor demand continued to support markets including South Korea, Taiwan and Japan, while weaker consumer spending, investment and property activity remained a headwind for China.
- Continued investment in AI infrastructure remains an important support for global economic activity and corporate earnings, helping offset some of the pressure created by higher energy prices and borrowing costs.
Global equities were relatively subdued in September as investors balanced resilient economic activity against higher energy prices and rising borrowing costs. AI-related companies remained an important source of support, particularly in the US, where continued investment in computing infrastructure helped growth-oriented areas remain resilient. UK and European equities faced a more difficult backdrop as higher energy costs weighed on industrial and consumer-facing businesses, while rising bond yields also pressured more interest-rate-sensitive sectors. Asian markets were mixed, with continued strength in semiconductor-related areas offset by weaker Chinese consumption and investment. Overall, equity markets proved relatively resilient given the scale of the move in interest rates and energy prices.
Government bonds experienced a much more difficult month as investors reassessed the outlook for inflation and interest rates. The US 10-year Treasury yield rose from 4.74% to 5.28%, while the equivalent UK gilt yield increased from 5.14% to 5.42%, its highest level in 19 years. Japanese government bond yields also moved materially higher, with the 10-year yield reaching 3%. Higher inflation, continued government borrowing requirements and increasingly restrictive central-bank policy all contributed to the rise in yields and corresponding fall in bond prices. Longer-dated government bonds were particularly sensitive, as markets increasingly accepted that interest rates may need to remain elevated for longer.
Commodities provided one of the clearest reflections of September’s changing backdrop. Brent crude rose by around $13 over the month to just above $103 a barrel, as renewed Middle East disruption increased concerns over global energy supply. Gold moved in the opposite direction, falling by almost $300 to around $4,186 an ounce following a particularly strong August. Rising real interest rates and a stronger US dollar increased the cost of holding an asset that does not produce an income. More broadly, the sharp rise in government bond yields created a less supportive environment for interest-rate-sensitive alternative assets such as infrastructure and property.
What does this mean for your financial plans?
While September’s developments highlight the challenges facing global markets, they also reinforce the importance of maintaining a long-term perspective. Inflation, interest rates and geopolitical uncertainty can all influence investment performance in the short term, but reacting to individual events or market movements is rarely the best approach. A well-diversified portfolio, aligned with your financial goals and attitude to risk, remains an important foundation for navigating changing conditions.
With the Autumn Budget approaching, you may also have questions about how potential changes to taxation, pensions or savings could affect your plans. We are here to help you make sense of these developments, review any implications for your personal circumstances and ensure your financial strategy remains on track. If you have any concerns or would simply like to discuss your plans, please don’t hesitate to get in touch.