29 Sept 2025
Central banks globally are adjusting monetary policies, with the Federal Reserve leading interest rate cuts driven by labor market concerns. These policy shifts are influencing equity markets and bond yields worldwide, presenting diverse outlooks for major economies and emerging markets.
The Federal Reserve reduced interest rates by 0.25%, setting the rate at 4.25%, with further 0.25% cuts anticipated in October and December based on dot plot projections. This decision stems primarily from concerns regarding potential weakness in the labor market, with Chairman Powell characterizing the move as a risk management measure.
The US economy currently exhibits stability despite some employment weakening, with inflation maintaining around 3%. Stock markets and credit sectors are performing at peak levels. Citygroup anticipates that the current cycle of rate reductions could potentially stimulate the economy further and boost lending activity. Medium-term bond yields, specifically five-year maturities, remain stable but are expected to decline if the labor market weakens, provided there are no indications of a recession.
Citygroup observed that Federal Reserve rate cuts have historically occurred near the stock market's peak. Since 1980, the Federal Reserve has implemented 13 rate reductions when the S&P 500 was close to its historical high, and in every instance, the index showed positive returns within a year, averaging between 14.5% and 17.5%. The S&P has already grown by 17.5% compared to last year's figure following a similar rate cut in September 2024. Citygroup projects that in the long term, Federal Reserve rate reductions increase the likelihood of the stock market achieving new peaks.
The spread between US 10-year bond yields and German yields, which peaked last year, has decreased, contributing to the weakening of the US dollar this year. A similar narrowing trend is evident in the yield spread between the US and China, indicating a global easing of financial conditions largely facilitated by the United States. These conditions typically benefit emerging market currencies and their stock exchanges, including those in Brazil, Mexico, and South Africa.
Citygroup forecasts a continued weakening of the US dollar through the end of the year. Internal disagreements within the Federal Reserve are a factor contributing to Citygroup's sustained pessimistic outlook for the dollar into the next year, anticipating its ongoing depreciation.
The US equity market has seen an increase, reaching new highs. In contrast, European equities have experienced a slight decline, weighed down by persistent concerns over high debt levels and some tariff adjustments. The UK stock market has also faced a downturn, primarily due to August government spending reaching a five-year high and upcoming challenges with its autumn budget.
US 2-year and 10-year bond yields have declined, despite Chairman Powell's description of the Fed's rate cut as cautious, suggesting the market anticipates a more aggressive easing cycle. German 10-year bond yields have also fallen, indicating plans for increased debt issuance. Conversely, UK 10-year bond yields rose to 4.7% after the UK's budget deficit significantly exceeded forecasts.
Goldman Sachs reported a slight decrease in oil prices, attributed to reduced concerns about US demand and a diminishing impact from geopolitical news such as Ukrainian attacks on Russian refineries. Brent crude and West Texas Intermediate (WTI) were trading around $66 and $62 per barrel, respectively, reflecting this minor decline.
The Bank of England has maintained its interest rate at 4% but decided to moderate its quantitative tightening policy, reducing asset sales from £100 billion to £70 billion starting in October. With inflation stable at approximately 4%, the BOE is expected to keep its policies largely unchanged this year. However, the contractionary budget scheduled for November 26th could influence future decisions, potentially allowing for further easing if pressure on household incomes lessens.
Financial concerns and investor pessimism surround the British pound. Conversely, there is a positive outlook for short-term UK interest rates, particularly if the labor market performs weaker than consensus expectations.
The Chinese stock market has outperformed many developed countries this year, largely driven by capital inflows from domestic investors. Supportive policies, influenced by global financial easing and expectations of further Federal Reserve rate cuts, continue to attract capital. Chinese households are increasing their equity investments due to low bond yields, low bank deposit rates, and sustained weakness in the real estate sector. Coordinated purchases by state funds and directives encouraging insurance companies to allocate more capital to equities are also boosting inflows. Goldman Sachs anticipates continued capital inflows, citing attractive valuations and relatively low equity allocations by both Chinese households and global investors to Chinese stocks.
Goldman Sachs advises investors in the Chinese market to be vigilant about risks, including US-China trade tensions, potential shifts in government regulatory policies, and renewed weakness in the real estate sector. An active and fundamental-driven approach to capital allocation is crucial, focusing on companies with strong profitability potential. This includes firms transitioning from traditional manufacturing to models centered on consumption, technological innovation, and advanced production. Goldman Sachs projects that domestic capital and holiday-related liquidity injections will continue to support the Chinese stock market, likely leading to sustained growth until at least year-end.
Recent market reports are predominantly centered on the Federal Reserve's interest rate decisions and the broader strategies of central banks, including the ECB and BOE. Discussions highlight the implications of these monetary policy paths, particularly concerning further rate cuts amidst persistent high inflation, and their subsequent effects on global stock markets.
When the Federal Reserve lowers rates, reaching new stock market peaks is more probable in the long term, with historical data showing positive returns one year after cuts near market peaks.
| Topic | Key Insight |
|---|---|
| Federal Reserve Rate Cuts | The Fed reduced interest rates by 0.25% to 4.25% due to labor market weakness concerns, with two more 0.25% cuts projected by year-end. This action is viewed as a risk management measure. |
| US Stock Market & Fed Cuts (Citygroup) | Historically, Fed rate cuts near S&P 500 peaks led to positive 1-year returns (14.5-17.5%). Long-term, Fed rate reductions increase the likelihood of new stock market peaks. |
| Global Yield Spreads & Dollar | Decreasing US-Germany/China bond yield spreads indicate global financial easing, contributing to US dollar weakening and benefiting emerging markets. |
| Bank of England (BOE) Policy | The BOE maintained rates at 4% but reduced its quantitative tightening pace (asset sales) from £100bn to £70bn. Policy is likely stable, but the UK budget deficit could influence future easing. |
| China Stock Market Inflows (Goldman Sachs) | Chinese equities outperform due to domestic investor inflows, supportive policies, low alternative investment returns (bonds/deposits), and government/insurance directives. Inflows are expected to continue due to attractive valuations and low existing allocations. |
| China Stock Market Risks & Strategy | Investors should be cautious of US-China trade tensions, regulatory changes, and real estate weakness. An active, fundamental-driven investment approach is crucial, favoring companies shifting to consumption/innovation models. |
