Global markets experienced a slight uptick in volatility overnight but until then the relentless rise of markets had continued their relentless rise.

Fed's Balancing Act Sets the Tone

The Federal Reserve's 25 basis point rate cut dominated early week sentiment, though the decision revealed significant internal divisions. While the median dot plot suggested two more cuts this year, approximately one-third of FOMC members projected no further easing in 2025. Fed Chair Powell's subsequent comments emphasised that policy remains "not on a preset path" tempering market enthusiasm for aggressive rate cuts. That meant that the "higher for longer" narrative made a comeback in recent days which, along with more commentary from Jerome Powell on sticky inflation and ‘highly valued’ equity markets, has put markets on the back foot.

Diverging Regional Economic Performance

U.S. equities demonstrated remarkable resilience, with the S&P 500, Dow, and Nasdaq all reaching record highs mid-week before moderating. Small caps, represented by the Russell 2000, showed particular strength with gains exceeding 2% at points, reflecting some resilient optimism about domestic growth prospects. Technology stocks led advances earlier in the week, buoyed by Nvidia's announced $100 billion investment in OpenAI infrastructure and strong iPhone 17 demand lifting Apple shares nearly 4%.

European markets painted a more mixed picture. Manufacturing PMIs across the eurozone fell into contraction territory, with Germany dropping to 48.9 and France declining sharply to 48.1. Services activity provided some offset, keeping composite indicators barely above 50, but the data reinforced concerns about the region's growth trajectory.

Australian Markets Face Domestic Headwinds

The ASX 200 also gave back gains from earlier in the week as inflation data surprised moderately on the upside and year on year CPI drifted back above 3%, while the RBA’s preferred ‘Trimmed Mean’ measure also appears to have stalled at around that level. Employment data surprised to the downside with a 5,000 job loss in August, though the unemployment rate held steady at 4.2% due to lower participation. The Australian dollar weakened from above 67 U.S. cents to below 66 cents, pressured by China-related concerns after reports that Chinese entities ordered steel producers to halt purchases of certain BHP iron ore grades during contract negotiations.

Bond Markets and the Search for Yield

Treasury yields rose modestly throughout the week, with 10-year yields climbing above 4.15% before retreating. The compression of investment-grade credit spreads to multi-year lows at 72 basis points reflected strong demand for corporate debt as investors sought yield enhancement. 

Commodities and Currency Movements

Gold continued its remarkable run, breaching $3,800 per ounce for another record high, reflecting persistent haven demand and central bank accumulation but also probably increased flows from retail investors and hedge funds. Oil prices showed volatility but ended relatively flat, with geopolitical tensions offset by demand concerns. The Japanese yen weakened following the Bank of Japan's decision to maintain rates while announcing plans to unwind ETF holdings, creating uncertainty about future market support.

Looking Ahead

Overall, this week's developments suggest markets are transitioning from anticipating aggressive monetary easing to accepting a more gradual normalisation of policy while the latest missive from Economist Andrew Hunt also suggests that liquidity is currently buoying U.S. financial markets. This is more specifically due to large foreign capital inflows attracted by expectations of Federal Reserve rate cuts; these inflows have outweighed domestic liquidity weakness from heavy Treasury bill issuance and TGA rebuilding, supporting asset prices much like the rally seen prior to the GFC in 2006.  

Overall, Hunt Economics seem relatively sanguine on markets for now, but we think this tallies with the relentless and constant lifting of all boats recently (the markets certainly seem to be reacting to something other than the diverging economic performance noted above). This is something we are keeping an increasingly close eye on. 

‍