United States
U.S. equity markets surged to new highs over the week, fueled by the Federal Reserve’s decision to reduce short-term interest rates for the first time in nine months. Smaller companies benefited most from the shift in monetary policy, with the Russell 2000 Index gaining 2.16%. Large-cap indexes also advanced: the Nasdaq Composite rose 2.21%, the S&P 500 increased 1.22%, and the Dow Jones Industrial Average added 1.05%.
Geopolitical news also shaped sentiment. On Friday morning, U.S. President Donald Trump and China’s President Xi Jinping held a phone conversation. Following the call, Trump announced via social media that progress had been made on several issues, including a framework for U.S. ownership of TikTok and further trade discussions.
Fed’s First Rate Cut of the Year
The centerpiece of the economic calendar was the Federal Reserve’s midweek policy meeting. As anticipated, the central bank lowered its policy rate by 25 basis points (0.25%), marking its first adjustment since December 2024. The lone dissenter, newly appointed Governor Stephen Miran, argued for a deeper cut of 50 basis points. Policymakers pointed to weaker job growth and rising risks to employment as key factors behind their decision, highlighting in their statement that “job gains have slowed” and that risks to employment had increased.
Because the move was widely expected, markets quickly turned to the Fed’s forward-looking guidance. The Summary of Economic Projections revealed that most officials anticipate reducing rates by an additional 50 basis points by year-end, a more aggressive easing stance than projected in June. Forecasts for further cuts in 2026 and 2027 were also revised higher.
Retail Sales Solid, Housing Market Soft
Economic releases outside of monetary policy painted a mixed picture. The Commerce Department reported that retail sales climbed 0.6% in August, triple the consensus forecast of 0.2%. July’s number was revised upward, and August’s gain marked the third consecutive positive reading, underscoring the resilience of consumer spending.
Conversely, housing data was disappointing. Housing starts fell 8.5% in August to an annualized pace of 1.31 million, short of the 1.37 million expected. Meanwhile, the National Association of Home Builders’ sentiment index held steady at 32, below forecasts. Still, expectations for sales in the next six months improved, supported by lower mortgage rates and the likelihood of further Fed cuts.
Treasury Market Response
In fixed income, U.S. Treasuries generated negative returns as yields on longer maturities rose, while short-term yields barely moved. Traders pointed to anticipation of the Fed’s announcement and subsequent remarks by Chair Jerome Powell, which were perceived as leaning hawkish, as key drivers of the yield curve movement.
Index Performance (Friday’s Close):
| Index | Friday’s Close | Week’s Change | % Change YTD |
| DJIA | 46,315.27 | 481.05 | 8.86% |
| S&P 500 | 6,664.36 | 80.07 | 13.31% |
| Nasdaq Composite | 22,631.48 | 490.37 | 17.20% |
| S&P MidCap 400 | 3,284.33 | 1.93 | 5.24% |
| Russell 2000 | 2,448.77 | 51.70 | 9.80% |
Illustrative only. Indexes are unmanaged, and past performance is no guarantee of future results.
Europe
The STOXX Europe 600 Index ended the week modestly lower in local currency terms as investors weighed several monetary policy decisions. Market performance varied across major economies: France’s CAC 40 rose 0.36%, Germany’s DAX slipped 0.25%, Italy’s FTSE MIB fell 0.60%, and the UK’s FTSE 100 declined 0.72%.
Bank of England Holds Rates, Adjusts Bond Sales
The Bank of England (BoE) voted 7–2 to keep its policy rate at 4%. Policymakers also announced they would scale back the pace of asset sales to GBP 70 billion annually from GBP 100 billion, aiming to limit disruptions in gilt markets amid elevated long-term yields. Governor Andrew Bailey stressed that although inflation is moving toward the 2% target, any future cuts would need to be gradual.
UK Inflation Stable, Labor Market Cooling
Annual inflation held at 3.8% in August, while wage growth, including bonuses, accelerated to 4.7% in the three months through July. Despite strong pay growth, signs of labor market weakness emerged. The unemployment rate held steady at 4.7%, but tax records showed the number of payrolled employees declined for the seventh straight month.
Norway and Eurozone Updates
Norway’s central bank lowered its key policy rate by 25 basis points to 4.0%, its second cut of the year. The bank signaled a cautious approach, noting another move is unlikely before mid-2026.
In the euro area, industrial output rebounded 0.3% in July after contracting 0.6% in June. Gains in capital and consumer goods offset declines in energy production, easing concerns about tariff-related disruptions.
Japan
Japanese markets delivered mixed results. The Nikkei 225 advanced 0.62%, while the broader TOPIX slipped 0.41%.
The Bank of Japan (BoJ) left its policy rate at 0.50% but surprised markets by announcing plans to begin reducing its holdings of exchange-traded funds and real estate investment trusts earlier than expected. Two policymakers dissented, favoring a rate increase, marking the first such split under Governor Kazuo Ueda.
Markets interpreted the decision as hawkish, and yields reflected this view: the 10-year government bond yield climbed to 1.62% from 1.58%.
Inflation and Trade
Core consumer inflation slowed to 2.7% in August from 3.1% in July but remained above the BoJ’s 2% target. Policymakers emphasized that underlying price stability is not yet achieved.
Exports declined only 0.1% year-over-year in August, far better than expectations for a 1.9% drop. A trade agreement with the U.S. in late July helped mitigate tariff-related headwinds.
China
Mainland Chinese stocks retreated as investors locked in profits and weaker data signaled slowing momentum. The CSI 300 dropped 0.44%, while the Shanghai Composite fell 1.30%. In contrast, Hong Kong’s Hang Seng Index rose 0.59%.
August Data Disappoints
Retail sales rose 3.4% year-over-year in August, industrial production increased 5.2%, and fixed-asset investment grew only 0.5% in the first eight months—one of the weakest performances outside the pandemic period.
These underwhelming figures highlighted growing concerns about China’s economic trajectory. With factory-gate prices falling for the 35th consecutive month and consumer prices slipping back into negative territory, deflationary pressures persist.
The housing sector remains a significant drag. Prices for both new and existing homes declined in August, while new home sales in Beijing fell 19% compared with a year ago. Markets now expect authorities to roll out targeted measures to stabilize property activity.
Other Key Markets
South Africa
The South African Reserve Bank left its policy rate unchanged at 7.00%. Policymakers described external conditions—such as easing in the U.S. and UK, a weaker dollar, and stable oil prices—as supportive, but noted global risks from higher long-term rates.
Domestic growth improved, with GDP expanding 0.8% in Q2, the strongest pace in two years. The central bank nudged up its 2025 growth forecast to 1.2% from 0.9% but warned that stronger investment is needed for sustained gains. Inflation is expected to rise in coming months, driven by food and electricity costs.
Brazil
Brazil’s central bank maintained its Selic rate at 15.00%. Officials reiterated that the environment requires a “significantly contractionary” stance for a prolonged period. They noted that while growth has moderated, the labor market remains solid and inflation is still above target. Policymakers stressed they would not hesitate to raise rates again if conditions warrant.
