Markets react to rate cut optimism

Market update

Global stocks rose by 1.2% last week in GBP terms as optimism continues to grow over the now confirmed Federal Reserve interest rate cuts. The major macroeconomic releases of the week largely reinforced investors’ expectations on the path of interest rates, which have been pricing in a guaranteed cut at the Federal Reserve’s September meeting. Inflation measures, including CPI and PPI, came in line or softer than forecasts, while the annual revision to the employment figures from the Bureau of Labor Statistics showed that 911,000 fewer jobs were created by the US economy in the 12 months to March 2025 than had previously been estimated – highlighting job market weakness. The earnings of the database software company Oracle also drove positive sentiment mid-week in technology stocks after announcing a major increase in earnings guidance – which drove its share price up by more than 40% at its highest point on Wednesday. US and emerging market stocks were the strongest performers last week, rising by 1.2% and 3.7% respectively in GBP terms. UK stocks rose by 0.8%, driven by strong returns in the banking sector.

10-year government bond yields saw volatility throughout the week, as markets reacted to US macroeconomic releases, but ended the week only slightly higher or flat, with the US 10-year treasury yield remaining unchanged at 4.07% and the UK and German equivalents rising by +2 and +5 basis points, respectively. Gold rose by 1.2% on rate cut optimism, while the oil price edged up by 0.9% in GBP terms.

Macro news

Political instability in France does not change the ECB's stance. On Monday, France's Prime Minister, François Bayrou, was ousted after losing a no-confidence vote. He is the fifth Prime Minister to be replaced in under two years. This political turmoil is directly linked to the country's debt problem, as Bayrou's proposals for austerity measures to reduce France's mounting debt were rejected by parliament. Amidst these events, France's borrowing costs have risen and are currently above Italy's.

Despite this more turbulent financial context, the European Central Bank is expected to keep interest rates unchanged at its policy meeting on Thursday. Eurozone inflation has remained stable, hovering near the 2% target. Most analysts believe the deposit rate will remain at 2% until at least the end of next year.

U.S. inflation accelerated in August. US consumer inflation increased to 2.9% YoY (from 2.7% in July), showing inflation remains persistent. On a monthly basis, the CPI rose by 0.4%, driven primarily by increases in the cost of shelter and transportation services. Core CPI, which excludes food and energy, remained steady, rising 3.1% YoY. The Federal Reserve is expected to cut interest rates by 0.25% next week and to ease the financial conditions in the coming months.