Waiting for the Fed

Last week was marked by expectations of monetary easing in the US and a renewed appetite for risk, despite the ongoing political turmoil in Europe.

US indices trading on new highs

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US equities are still rising, with the S&P 500 setting its 34th annual record. The Nasdaq 100, on an AI-induced powerplay, is trading on all-time highs. The uptrend is riding the classic “bad news is good news” trend. Namely, while inflation and jobs are showing signs of slowing, this is fuelling expectations for the Fed to embark on an easing cycle as early as this coming Thursday.

The consumer price index gained 2.9% year-on-year in August, in line with expectations. Core inflation was 3.1%. In unadjusted terms, producer prices were marginally lower month-on-month (-0.1%) but the core indicator gained traction, rising by 2.8% year-on-year (highest level since March). Meanwhile initial jobless claims rose to 263,000, another sign that the job market is losing steam. These data make the case for a decline in the 10-year yield to around 4%. Looking at sectors, tech and cyclicals (such as automotive and materials) have driven the market ahead, whereas energy has given up ground following the sharp increase in US crude reserves. The assassination of Charly Kirk symbolises the polarisation of the political landscape and underscores the increasingly violent climate in American politics.

European equity indices advanced modestly after the ECB kept its deposit rate at 2.0% and signalled that the tightening cycle may have run its course, with Christine Lagarde stating that policy was now suitable. This stance buoyed export-oriented stocks such as automotive and consumer goods. Banks also held firm, while healthcare and pharmaceuticals dragged on the market.

Political turmoil in France rekindled concern over sovereign debt. Fitch cut the country’s rating from AA- to A+ following François Bayrou’s parliamentary defeat. The OAT-Bund spread widened to its highest since mid-2024, although the market reaction has so far been contained.

No change likely in Switzerland

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In Switzerland, domestic inflation remains close to zero (+0.2% in August), supporting the SNB’s wait-and-see stance. Martin Schlegel said that only compelling reasons would justify a return to negative rates and indicated that policy is likely to stay unchanged at the 25 September meeting. The main threat comes from abroad, namely that US tariffs of almost 39% on Swiss imports, hitting watchmaking and pharmaceuticals, pose a serious challenge to competitiveness and heighten the risk of a sharp domestic slowdown.

In China, August data underscored a slowdown in domestic demand: industrial production rose 5.2% and retail sales 3.4%, both below expectations. On the diplomatic front, Vice-Premier He Lifeng met his US counterpart in Madrid, signalling progress in reviving bilateral talks.

For the week, the S&P 500 advanced 1.59%, the Nasdaq 1.86% and the Stoxx Europe 600 1.03%, while the SMI lost 1.43%. The coming days will centre on monetary-policy meetings, Chinese lending figures and corporate earnings.