09/15/2025

This past week has once again underscored how deeply politics and economics are intertwined in the current phase of the cycle. In the United States, the Federal Reserve's independence has become more than just a theoretical issue, moving into the courts and the Senate. Governor Lisa Cook is under legal protection from dismissal, and Stephen Miran, a nominee from the Trump era, is on the verge of being confirmed as a member of the Committee.

Meanwhile, macroeconomic data has strengthened expectations for an imminent rate cut in the U.S.: August inflation stayed under control, wholesale prices fell more than anticipated, and the labor market showed further signs of weakness, with significant downward revisions to employment growth. In this context, markets are fully anticipating a 25 basis point cut at this week's Fed meeting. However, the focus will be on Powell's tone and the updated projections from board members.

In Europe, political developments once again shifted attention away from the ECB. The collapse of François Bayrou's government and the appointment of Sébastien Lecornu in France have intensified concerns about fiscal sustainability, especially following Fitch's credit rating downgrade. The spread on French bonds sometimes exceeded that on Italian bonds, indicating a loss of investor confidence.

At its monetary policy meeting, the ECB maintained the deposit rate at 2%, as expected. While Lagarde emphasized that inflation is under control, the ECB's own projections suggest it may fall below target by 2027, potentially paving the way for further rate cuts if the economy continues to cool. Lagarde refrained from commenting on domestic issues, particularly the situation in France, but she reiterated that the institution is equipped with tools to manage market tensions if necessary.

China, for its part, showed mixed economic signals. Inflation returned to negative territory on a year-on-year basis due to falling food and beverage prices, although core inflation improved slightly. Producer prices ended eight consecutive months of declines. However, August's export data was weak: a year-on-year growth rate of 4.4% suggests that China can no longer make up for the decline in shipments to the United States with sales to other countries. Overall, the economy is losing momentum, with weak domestic demand and a foreign sector that no longer provides support.

In this environment, equities continued their upward trend. The Goldilocks narrative was once again prevalent, bolstered by expectations of Fed rate cuts and the resilience of global activity. The United States led the way: the S&P 500 rose by 1.6% and the Nasdaq by 2%, both reaching new all-time highs. The rally driven by the Magnificent Seven stocks and the surge in interest in artificial intelligence, spurred by Oracle's strong results, were the main factors behind the gains in the U.S.

Europe saw more modest increases. The EuroStoxx 50 gained 1.4%, with Spain standing out after Inditex posted positive results, pushing the Spanish index to the top of the European markets with a year-to-date gain of over 32%. Japan also made a notable impact, with the Nikkei climbing 4% over the week. In emerging markets, the momentum was concentrated in Asia, where the stock market index recorded a solid weekly increase of 5.4%.

This week, all eyes will be on the Fed. A 25 basis point cut is widely expected, but Powell's tone will be crucial in determining whether the easing cycle will continue. Other important events include meetings of the Bank of England and the Bank of Japan, as well as U.S. retail sales and industrial production data. Additionally, the eurozone's industrial production figures and final CPI reading will be closely watched.

Overall, markets are buoyed by a positive backdrop supported by lower interest rates and the structural momentum of AI, but risks remain: these include high equity valuations, the potential for a sharper slowdown in economic activity, political tensions in Europe, and the ongoing threat of new geopolitical and trade shocks. While the trend is positive, it is important to remain cautious in managing an environment where investor enthusiasm coexists with pockets of vulnerability.