The week that was …
Economic round-up
US rate cut
As had been widely expected, the Federal Reserve cut US interest rates by 0.25%, to a range of 4%-4.25%. The US central bank also signalled two more rate cuts by the end of the year, saying it was more concerned about a weakening labour market than inflation. Read more from CNBC here
UK rate decision
The Bank of England held rates at 4%, with the Monetary Policy Committee voting 7-2 to leave UK borrowing costs unchanged. The other two members voted for a cut. The UK central bank also said it would slow the pace of its quantitative tightening programme. Read more from the Guardian here
UK inflation
UK consumer prices rose 3.8% year on year in August, in line with the previous month – and also with analysts’ expectations. The costs of food and non-alcoholic drinks grew at an annual rate of 5.1%, however, as beef, butter, milk and chocolate prices continued to surge. Read more from the BBC here
UK jobs data
UK unemployment hit 4.7% in August – up 0.1 percentage points on the previous three months and the highest rate in four years. The economic inactivity rate was down 0.8 percentage points on a year earlier while wage growth remained relatively robust at 4.8%. Read more from the Guardian here
Japan rate decision
As widely expected, the Bank of Japan kept its key interest rate unchanged at 0.5% on Friday. “Japan’s economy has recovered moderately, although some weakness has been seen in part,” the bank said in a statement. “Overseas economies have grown moderately on the whole.” Read more from the Independent here
China economic data
Chinese retail sales grew less than expected in August – up 3.4% on a year ago, versus forecasts of 3.9%. This was also slower than the 3.7% seen in July. Industrial output growth meanwhile slipped to 5.2% for the month – the worst performance since August last year. Read more from CNBC here
US retail sales
US retail sales rose 0.6% in August – ahead of expectations. Higher prices account for some of the rise in sales, with import prices rising 0.3%, but the US consumer still appears to be showing resilience. Read more from Reuters here
UK retail sales
UK retail sales jumped in August, boosted by the warm weather and back-to-school shopping. Retail revenues rose 0.5% over the month, with particular strength in clothing sales and non-food store revenues. Read more from the Retail Gazette here
Markets round-up
Further highs for US equities …
Stockmarkets hit new highs this week, as borrowing spreads for US companies reached historically low levels over government bonds. Fears are emerging markets may be ‘priced for perfection’, however, despite mounting risks. Read more from the FT here
… but Footsie slows
The FTSE 100’s performance has been hit by shifts in the UK currency, but greater strength has been seen in the midcap sector. Gold-miners have been another bright spot, rallying strongly as gold hit new highs. Read more from IG here
Nvidia’s boost for Intel
Nvidia has said it will invest $5bn (£3.7bn) in Intel, in a boost to the struggling chipmaker. This comes after the White House engineered a deal for the federal government to take a significant stake in the company. Read more from Reuters here
US equities outflows
The week to 17 September saw significant outflows from US equity funds. Investors may be turning cautious on valuations in the wake of the Federal Reserve interest rate cut, pulling out a net $43.19bn. Read more from Reuters here
“Last week’s Fed interest rate cut may have provided temporary support to markets but the rally is looking increasingly fragile.
Selected equity and bond markets: 12/09/25 to 19/09/25
| Market | 12/09/25 (Close) |
19/09/25 (Close) |
Gain/loss |
|---|---|---|---|
| FTSE All-Share | 5018 | 4986 | -0.6% |
| S&P500 | 6584 | 6664 | +1.2% |
| MSCI World | 4253 | 4294 | +0.96% |
| CNBC Magnificent Seven | 396 | 409 | +3.5% |
| US 10-year treasury (yield) | 4.07% | 4.13% | |
| UK 10-year gilt (yield) | 4.7% | 4.72% |
Investment round-up
Morningstar ups healthcare weighting
Morningstar has increased its exposure to healthcare across its portfolios, saying the sector combines structural growth with defensive earnings and cheap valuations.
IHT receipts jump
Inheritance tax receipts hit £3.7bn for the first five months of the UK tax year. This represents an increase of £190m, or 5%, compared with the same period last year when £3.5bn was collected.
L&G launches factor index funds
L&G has launched three factor-based index funds, focusing on momentum, quality and value: the Developed World Momentum Factor Index, Developed World Quality Factor Index and Developed World Value Factor Index funds.
Royal London tops ‘most recommended’ list
The Royal London Pension Portfolio is the most recommended personal pension provider, according to new data from Defaqto, while Aviva leads in the self-invested personal pension market. AKG financial strength ratings remain the most popular factor for advisers.
Inheritors likely to switch advisers
Around 1.2 million older advised clients have suggested their child will not maintain their current advice relationship when they inherit, according to Boring Money research. Just one in five advised clients aged 65 felt confident their children would remain with their current financial adviser when they inherit family wealth.
… and the week that will be
Fed-watch
The latest Personal Consumption Expenditure reading, the preferred inflation measure of the US Federal Reserve, is due at the end of the week. Policymakers will be on high alert for evidence tariffs are working their way into consumer prices. Additionally, a number of Fed officials are making speeches over the week and these will be closely scrutinised for hints on the US central bank’s direction of policy. Read more from Investopedia here
US/China deal
As the week progresses, Wall Street should learn more about president Donald Trump’s meeting with Chinese premier Xi Jinping, which took place on Friday. The White House said the two sides had made progress towards a deal regarding TikTok. Further details from these discussions would be likely to move stocks. Read more from CNBC here
The week in numbers
US inflation: Consensus expectations for the Personal Consumption Expenditure price index are the Federal Reserve’s preferred measure of inflation will show US prices rising 0.3% month-on-month over August.
Eurozone consumer sentiment: Consensus forecasts for September have consumer confidence across the Eurozone rising to -14.8, from -15.5 in August.
UK business sentiment: The flash reading for September of the UK’s manufacturing purchasing managers index (PMI) is expected to rise to 49 from 47, while the services equivalent is expected to fall to 51.7 from 54.7.
German business sentiment: The flash reading for September of Germany’s PMI is forecast to move back to expansion territory – up to 50, from 40.8.
US business sentiment: The flash reading for September of the US’s manufacturing PMI is expected to fall to 52 from 53, while the services equivalent is expected to fall to 53 from 54.5.
In focus: Cut and trust
US stockmarkets hit still more highs last week, as investors celebrated the Federal Reserve’s quarter-point interest rate cut. At the same time, though, there are signs of nerves on valuations, with investors pulling record sums from US-focused equity funds over the week. Is the current exuberance around rate cuts likely to be short-lived?
While all markets have felt the knock-on effects of the Fed’s rate cut, the US market has been particularly strong. Over the past three months, the S&P 500 is up 11.7%, compared with just 4.5% for the Eurostoxx 50 and 5.2% for the FTSE 100. With the exception of certain niche areas such as defence companies, optimism is far harder to find outside the US. In the recent past, it has largely proved an error to bet against the strength of US equities.
As Ben Inker, co-head of GMO’s Asset Allocation team, observes: “The reason people are bulled up on the US stockmarket is quite straightforward: the US has had a rip-roaring economy, and domestic equities have massively outperformed every other broad stock or bond index for over a decade. The S&P 500, for instance, has outpaced the rest of developed market equities by a cumulative 150% in the past 15 years. To state the obvious – that’s a lot.”
For Inker, the investor’s dilemma today is straightforward. “If American companies delivered amazing revenue and earnings growth and there are signs they can continue doing this, we should want to own them,” he says. “If they rallied because of overoptimism and complacency, we probably shouldn’t.”
What then would count as evidence of overoptimism and complacency? First, on interest rates, market expectations are still out of sync with the Federal Reserve. As Rothschild Asset Management points out, ahead of last week’s Fed meeting, financial markets were anticipating nearly six key interest rate cuts between now and the end of 2026 – including nearly three over the next three meetings.
Historically, high valuations in technology companies were somewhat justified by their capital-light model – yet this is no longer the case given colossal investments into AI, which should lead in turn to a derating.”
For its part, the Federal Reserve revised its expectations, suggesting there would be more and faster interest rate cuts than previously expected. Equally, Fed chair Jerome Powell argued weakening jobs data appeared to be a greater risk than inflation.
And yet the central bank is still not in step with market expectations, with its ‘dot plot’ indicating a median estimate of 3.4% for the federal funds rate at the end of 2026. In particular, the single quarter-point reduction expected next year is significantly more conservative than current market pricing.
On that measure alone, the market looks complacent – but investors also have to consider earnings. For Redwheel’s Ian Lance, who manages the Temple Bar investment trust, that means looking at whether the excess growth in the US is a thing of the past or could persist further.
The technology sector is an obvious place to start as this is where historic excess growth in the US has been concentrated and Lance says: “Research shows the median US company is now doing worse than the median international company, with a full 60% of the companies in the S&P 500 unable to reach the ‘old norm’ fundamental return of 6% real in 2024.
“Investors in US equities must therefore ask themselves if this tech stock concentration remains sustainable, while also factoring in the risk of AI in this sector. Historically, high valuations in technology companies were somewhat justified by their capital-light model – yet this is no longer the case given colossal investments into AI, which should lead in turn to a derating.
“This scenario is reminiscent of the telecoms boom in 2000, during which time I was a telecoms analyst. During this period tech companies heavily invested in this sector, which turned out to be great for consumers and terrible for shareholders.” Lance’s view is that investors are now paying a massive premium for US equities despite the prospect of no additional growth.
There is also evidence investors are increasingly looking to hedge their exposure to the US dollar – a sign of growing nervousness about the country’s current economic policy.”
Signs of nervousness among investors are becoming more evident – for example, Reuters reports LSEG Lipper data showing investors pulled out a net $43.19bn (£32bn) from US equity funds in the week to 17 September. This was the most significant outflow since mid-December 2024.
At the same time, there is evidence investors are increasingly looking to hedge their exposure to the US dollar – a sign of growing nervousness about the country’s current economic policy. Deutsche Bank analysis shows hedged investments into US bonds and equities are outstripping unhedged holdings for the first time in four years. In the latest Bank of America global fund manager survey, meanwhile, a record 58% of participants viewed global equity markets as overvalued – up slightly from 57% in August.
“It is interesting to note the change in sentiment among UK investors.” says James Klempster, deputy head of multi-asset investment at Liontrust. “From November 2024 to April 2025, North America dominated flows into equities. Then we saw a dramatic switch, with North American flows turning negative and positive net inflows into Europe and Japan, the latter of which has been enjoying a lesser-known stockmarket rally.
“We have been underweight US largecap equities for some time and believe it is important to diversify in this environment to mitigate risks and take advantage of new opportunities. This means by asset class, geographically, cap size and investment style – for example, US smaller companies now trade at a substantial discount to largecap stocks, making them attractively valued once again.”
Last week’s Fed interest rate cut may have provided temporary support to markets but the rally is looking increasingly fragile. Expectations of future cuts appear too high while valuations look increasingly stretched. Yes, over the last decade and more, it has been wrong to bet against US equities, but there are solid reasons why ‘US exceptionalism’ may not persist from here onwards. Investors should tread warily.
Read more on this from CNBC here, from GMO here and from Reuters here
In focus: Hold and reality
For its part, the Bank of England held rates at 4% last week. With just one meeting to go until the end of the year, another 2025 cut is starting to look vanishingly unlikely. The central bank’s Monetary Policy Committee warned that “upside risks around medium-term inflationary pressures remain prominent in the committee’s assessment of the outlook”.
The hold did not come as a surprise, but the accompanying remarks were more negative than had been expected. Indeed, Bank of England governor Andrew Bailey appeared to criticise the government, suggesting efforts to contain labour costs had been delayed by the rise in employer National Insurance contributions and a hike in the minimum wage.
The only apparent reprieve for the gilt market was the decision to scale back the quantitative tightening (QT) programme from the £100bn reduction in gilt holdings achieved over the last year to £70bn targeted over the coming 12 months – exactly the level anticipated by the market. The Bank also said it would focus on selling more bonds with shorter maturities and only 20% of sales would be from longer-duration issues with maturities beyond 2055.
“The Bank seems confident QT is not having a big effect on the present state of the gilt market, which does look to be highly correlated with overseas developments,” notes Laith Khalaf, head of investment analysis at AJ Bell.
“The good news for Rachel Reeves is that 30-year bond yields have moved down over the course of this month – from a peak of almost 5.7% to just over 5.4% now. This has closely tracked downward movement in yields in long-dated US treasury bonds, as investors have digested a weaker US labour market and an interest rate cut from the Fed.”
The chancellor has said that she and the prime minister have asked government departments to look at what can be done to lower consumer prices ahead of the Budget. Given the reluctance of many Labour MPs to support spending cuts, however, Khalaf believes tax rises rather than inflation controls will almost certainly be the main thrust of the Budget in November.
The Bank of England meeting also showed that while it may be happy to stabilise the gilt market, the bank was not going to do anything more to help the government’s current fiscal predicament. John Wyn-Evans, head of market analysis at Rathbones argues this may be a good thing, however.
“The Bank of England is displaying its independence at a time when investors are nervous that central banks are at risk of succumbing to control from political leaders, with the battle between the White House and the US Federal Reserve being most critical,” he says. Nevertheless, that still leaves Reeves struggling to balance the books.
