09/08/2025

In the first week of September, markets delicately weighed these slowdown signals against their belief in ongoing central bank assistance. In the United States, the focus was on employment data and the Federal Reserve's recently more flexible stance. The labor market showed further signs of strain: job creation dropped to multi-year lows, and the unemployment rate edged up slightly. While this does not yet indicate a severe downturn, it does represent a slowdown compared to the robust GDP growth seen in previous quarters. The government faces an imminent motion that, if successful, would force President Emmanuel Macron to appoint a new prime minister or even call early elections.

Meanwhile, Europe faced another week of political tension, with France in the spotlight. The government is dealing with an imminent motion that could force President Emmanuel Macron to appoint a new prime minister or even call early elections if it passes. This uncertainty arises while the country's fiscal situation is already causing concern, and the absence of a clear consolidation plan is undermining investor confidence. French debt spreads over Germany remain high, signaling a persistent risk premium that could stay elevated until the political crisis is resolved.

Despite these disruptions, a common thread runs across all regions: the perception that the global economy is cooling, but not collapsing. This narrative, dubbed the “Goldilocks” scenario in reference to the famous children's story, suggests that economic activity is striking an ideal balance —not too hot to push inflation rates upward, nor too cold to hinder corporate profit growth. This environment enables central banks to maintain a less aggressive monetary policy, as long as inflation stays close to their long-term targets.

In the United States, stock market indices remain near historic highs, largely fueled by enthusiasm for artificial intelligence and expectations that fiscal policy will continue to support investment in strategic sectors. Even recent downward revisions of earnings forecasts for major technology companies have not significantly dampened risk appetite.

In the fixed income markets, the most notable event of the week was the sharp drop in sovereign bond yields on both sides of the Atlantic. In the United States, the 10-year bond closed at a yield of 4.07%, marking a 15-basis-point decline for the week and hitting its lowest level since last April. Meanwhile, the yield on the 2-year bond plunged to 3.5%, a level not seen since September 2022, as expectations for an imminent Federal Reserve rate cut took hold.

Even the yield on the 30-year bond, which had recently been under scrutiny due to concerns about the Fed's independence, fell sharply to 4.75%. However, if the perception that the central bank's independence is under threat solidifies, we could see further upward adjustments in long-term inflation expectations, a weaker dollar, and gold becoming more attractive as a safe haven.

Indeed, gold has been a standout this week, breaking out of the range it had been trading in for months. While some attribute this to institutional fears, much of the movement is also due to the decline in short-term real yields, reinforcing gold's role as a natural hedge in an uncertain environment.

Emerging market credit and debt continue to demonstrate remarkable strength. The search for yield amid contained volatility has kept demand high, especially for local bonds from countries like Brazil, Mexico, and South Africa, where yields significantly outperform those of developed markets.

In short, the week underscored that markets are navigating a narrow path: they rely on the support of central banks but remain aware that any misstep in economic or institutional policy could trigger a sharp change in sentiment.

Thank you for joining us in this analysis. We'll hear from you very soon, in the next episode.