Strong US Data Lowering Odds of Multiple Fed Cuts

For the week ending 26 September 2025

As of midday Friday, global equities were lower on the week amid diminishing expectations that the Fed will cut twice more this year. The yield on the US 10-year rose 5 basis points from week-ago levels to 4.17%. The price of a barrel of West Texas Intermediate crude oil rose $2.75 to $65.82. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), edged up to 18.25 from 17.7 last week.

MACRO NEWS

Rate cut expectations trimmed amid strong US data

Following on the heels of last week’s solid US retail sales report, a sharp upward revision to Q2 GDP (3.8% annualized, up from 3.3%), solid durable goods orders (+2.9% in August), and a drop in weekly jobless claims (218,000; the lowest since mid-July) suggest that the US economy is holding its own. As a result, markets expectations for two more quarter-point rate cuts from the US Federal Reserve have receded somewhat. On the day of last week’s FOMC meeting, markets had priced in 58 basis points of easing by the December meeting. Today, markets are pricing in only 40 basis points in cuts.

Shutdown stalemate

With the end of the US government’s fiscal year approaching on September 30, the House of Representatives adjourned until October 1 and no negotiations scheduled between congressional leadership and the White House, a government shutdown looks likely starting next Wednesday, October 1. Before recessing, the House of Representatives passed a continuing resolution to fund the government through November 21, which puts the onus on Senate Democrats to either pass the bill or take responsibility for the ensuing funding crisis. The White House launched a pressure campaign this week, with the Office of Management and Budget (OMB) instructing federal agencies to design reduction in force plans for employees of programs that have no current funding, lack outside funding sources, or are inconsistent with the Trump administration’s priorities. However, if a short-term funding plan is passed before September 30, the plans will not be necessary, the OMB memo said. So far,  Senate Democrats appear unmoved by the threat.

Powell: Policy path ahead not risk free

US Federal Reserve Chair Jerome Powell said this week that while downside risks to employment have risen, long-run inflation expectations remain in line with the Fed’s 2% target. Though inflation uncertainty remains high, he expects tariffs to result in a one-time price increase spread over several quarters. Given both downside risks to employment and inflation uncertainty, there is no risk-free policy path ahead, he said. Powell added that some asset prices are elevated, but he made it clear that it is not the Fed’s job to target stock prices or decide what the right valuation should be.

US in talks to backstop Argentina

Per Treasury Secretary Scott Bessent, the US is discussing extending a $20 billion swap line to Argentina and stands ready to buy its dollar bonds. “We are working in close coordination with the Argentine government to prevent excessive volatility,” he said. US officials have made it clear that a condition of this aid would be to reduce Argentina's reliance on China, especially regarding an $18 billion Chinese currency swap line. The discussions have helped stabilize Argentine bonds after a sharp selloff in recent weeks amid growing economic and political challenges.

QUICK HITS

President Trump announced Thursday night that the US will impose 100% tariffs on branded pharmaceuticals produced by any companies that have not broken ground on production facilities in the US. Generic medications have avoided levies, and companies have been stockpiling inventories in the US in anticipation of these higher duties.

The US also announced new 25% tariffs on heavy trucks, as well as additional tariffs on furniture and cabinetry.

The Wall Street Journal reported this week that money market assets set a record $7.7 trillion last week despite the quarter-point rate cut from the Fed.

The United Kingdom, Canada, Australia and France have officially recognized a Palestinian state.

The Trump administration is considering requiring chip manufacturers to produce the same number of semiconductors in the US as their customers import from overseas producers. Companies that don’t maintain a 1:1 ratio over time would be subject to a tariff.

The final piece of the US inflation puzzle for August came in spot-on expectations, with the core PCE price index holding steady at 2.9%. Personal income and spending were both firmer than expected, rising 0.4% and 0.6% month-over-month, respectively. These unsurprising inflation readings allow the Fed to keep its focus on the labor market.

Analysts at Bank of America report that they see elevated signs of stress in the $1.7 trillion dollar private credit market this week, noting that default rates are rising and more borrowers are deferring cash interest payments.

The European Union said it will impose 25% - 50% tariffs on steel from China to protect local industry.

Late last Friday, Italy’s sovereign credit rating was upgraded to BBB+ with a stable outlook by Fitch Ratings. “The upgrade reflects increased confidence in Italy’s fiscal trajectory, underpinned by a growing record of fiscal prudence and strong commitment to meeting short- and medium-term fiscal targets under the new EU fiscal framework,” Fitch said.

Preliminary readings of global purchasing managers’ indices cooled in September, with the manufacturing sector leading the way. 

The OECD raised its global GDP forecast to 3.2%, up from June’s 2.9% forecast, as emerging markets proved more resilient than expected despite tariff headwinds. The OECD now expects headline inflation to moderate to 3.4% across G20 countries in 2025, slightly lower than June’s 3.6% projection.

The Trump administration has revised the H1-B visa application process, imposing a one-time $100,000 fee for new applicants. The H1-B is a visa class predominantly used in the technology sector to source skilled foreign workers.

Three Fed officials spoke favorably of the idea of a range for the US central bank’s inflation target, rather than the hard target of 2% it currently maintains. Fed Governors Stephen Miran and Michelle Bowman, as well as Atlanta Fed President Raphael Bostic, all discussed the idea in separate venues this week. 

New home sales in the US jumped 20.5% in August from the month before as mortgage rates eased. Existing home sales beat expectations but were nearly flat last month.

New Zealand named a current Swedish Riksbank official, Anna Breman, to lead the Reserve Bank.

China will give up “developing country” status within the World Trade Organization. The move follows long-standing objections by the US and European Union to China receiving special treatment afforded to developing countries.

The US government is considering taking an 10% equity stake in Lithium Americas. This would be the second stake taken by the government in a producer of critical minerals in recent months, and would be conditioned on the renegotiation of a $2.3 billion loan.

The US lowered tariffs on auto imports from the European Union to 15%, retroactive to August 1, as part of the framework trade agreement. The Department of Commerce and Office of the US Trade Representative jointly published a document detailing the changes, which reduce duties on a range of goods, including exemptions for sectors such as aircraft and generic pharmaceuticals.

Alan Greenspan, Ben Bernanke, Janet Yellen and other former top economic officials appointed by presidents of both parties urged the Supreme Court on Thursday to preserve the Fed's political independence and allow Lisa Cook to remain as a central bank governor for now.

THE WEEK AHEAD

Monday: US pending home sales

Tuesday: Japan industrial production, retail sales; UK Q2 GDP (final); US Case-Shiller home price index, JOLTS

Wednesday: Global manufacturing PMIs

Thursday: Eurozone unemployment; US durable goods

Friday:  Global services and composite PMIs; US employment report

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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research.