Global Economy & Markets, Weekly Roundup 22/09/25
The Fed cut interest rates, as expected, with more policy easing to come
The Federal Reserve lowered the Federal Funds Rate (FFR) by -25 bps to a range of 4.00% - 4.25% on Wednesday, with only one dissent (Governor Miran). According to overnight index swaps, rate cuts by the Fed are expected to continue, cumulating to -75 bps by Q1-2026, while monetary authority views remaining less dovish (median FOMC interest rate estimate or “dot”), with Chair Powell characterizing the decision as a risk management cut.
Indeed, there were only minor changes to the US economic outlook, with expected real GDP growth of +1.6% (Q4/Q4) for 2025 and +1.8% for 2026. At the same time, inflation is expected to revert to the target of 2% by end-2027, suggesting that the Committee will remain attentive to the risks to both sides of its dual mandate, even though labor market downside risks have increased.
Expectations for a “soft landing” of global economic activity are a key aspect of the benign (“goldilocks”) scenario being priced in by investors in Q3, with both global equity and aggregate bond prices edging higher simultaneously, by +11% and +1.8% qoq, respectively, is USD terms.
Equity majors reached fresh record highs, with the S&P500 up by +1.2% in the past week to 6664 (+13% YtD in USD terms). Euro area and Japanese equities followed suit, with the latter remaining broadly unperturbed by the (unexpected) decision by the Bank of Japan to sell ETFs and J-REITs, as the announced pace is extremely conservative.
Specifically, the Bank of Japan holds circa 80 trillion JPY in ETFs or 10% of the total market capitalization, albeit the pace of sales is expected to be 620 billion JPY per annum to avoid destabilizing financial markets. If the pace of sales remains constant, it would take 125 years for the BoJ to conclude the full sale of the ETF portfolio.
In addition, the Bank of Japan decided to maintain its short-term policy rate at a +0.5%, as expected, albeit with two Committee members voting for higher interest rates (7-2). As the BoJ has exited the negative interest rate regime it has been into since early-2006 and Japanese CPI inflation remains above the price stability target of 2%, long-term JGB yields have climbed to multi year highs.
The Bank of England stood pat, as expected, with the Bank Rate at 4.00% due to elevated inflation. Moreover, significant fiscal slippage in the first five months of the fiscal year 2025/2026 has kept long-term borrowing costs elevated, with the 30-Year UK Gilt at 5.56%, up by +40 bps year-to-date compared with -5 bps year-to-date for the same maturity US Treasury security (4.75%).
Long-term core global government bond yields moved slightly higher after the central bank meetings, with short-term Japanese government bond yields also increasing by +5 bps to 0.92% as the door for additional monetary normalization by the BOJ remains wide open. The JPY was broadly unchanged against the USD to \147.95, up by circa +6% year-to-date, albeit mostly due to dollar weakness.
Finally, euro area sovereign bond spreads remained broadly unchanged in the past week, albeit the 10-year BTP-Bund spread narrowed by -2 bps to 78 bps (OAT-Bund spread +2 bps wow to 80 bps) with the Fitch rating agency upgrading the Italian debt by one notch to BBB+ with a stable outlook, due to increased confidence in Italy’s fiscal trajectory. At the same time, the rating agency expects only limited additional defense expenses in 2026/2027.
The Federal Reserve lowered the Federal Funds Rate (FFR) by -25 bps to a range of 4.00% - 4.25% on Wednesday, with only one dissent (Governor Miran). According to overnight index swaps, rate cuts by the Fed are expected to continue, cumulating to -75 bps by Q1-2026, while monetary authority views remaining less dovish (median FOMC interest rate estimate or “dot”), with Chair Powell characterizing the decision as a risk management cut.
Indeed, there were only minor changes to the US economic outlook, with expected real GDP growth of +1.6% (Q4/Q4) for 2025 and +1.8% for 2026. At the same time, inflation is expected to revert to the target of 2% by end-2027, suggesting that the Committee will remain attentive to the risks to both sides of its dual mandate, even though labor market downside risks have increased.
Expectations for a “soft landing” of global economic activity are a key aspect of the benign (“goldilocks”) scenario being priced in by investors in Q3, with both global equity and aggregate bond prices edging higher simultaneously, by +11% and +1.8% qoq, respectively, is USD terms.
Equity majors reached fresh record highs, with the S&P500 up by +1.2% in the past week to 6664 (+13% YtD in USD terms). Euro area and Japanese equities followed suit, with the latter remaining broadly unperturbed by the (unexpected) decision by the Bank of Japan to sell ETFs and J-REITs, as the announced pace is extremely conservative.
Specifically, the Bank of Japan holds circa 80 trillion JPY in ETFs or 10% of the total market capitalization, albeit the pace of sales is expected to be 620 billion JPY per annum to avoid destabilizing financial markets. If the pace of sales remains constant, it would take 125 years for the BoJ to conclude the full sale of the ETF portfolio.
In addition, the Bank of Japan decided to maintain its short-term policy rate at a +0.5%, as expected, albeit with two Committee members voting for higher interest rates (7-2). As the BoJ has exited the negative interest rate regime it has been into since early-2006 and Japanese CPI inflation remains above the price stability target of 2%, long-term JGB yields have climbed to multi year highs.
The Bank of England stood pat, as expected, with the Bank Rate at 4.00% due to elevated inflation. Moreover, significant fiscal slippage in the first five months of the fiscal year 2025/2026 has kept long-term borrowing costs elevated, with the 30-Year UK Gilt at 5.56%, up by +40 bps year-to-date compared with -5 bps year-to-date for the same maturity US Treasury security (4.75%).
Long-term core global government bond yields moved slightly higher after the central bank meetings, with short-term Japanese government bond yields also increasing by +5 bps to 0.92% as the door for additional monetary normalization by the BOJ remains wide open. The JPY was broadly unchanged against the USD to \147.95, up by circa +6% year-to-date, albeit mostly due to dollar weakness.
Finally, euro area sovereign bond spreads remained broadly unchanged in the past week, albeit the 10-year BTP-Bund spread narrowed by -2 bps to 78 bps (OAT-Bund spread +2 bps wow to 80 bps) with the Fitch rating agency upgrading the Italian debt by one notch to BBB+ with a stable outlook, due to increased confidence in Italy’s fiscal trajectory. At the same time, the rating agency expects only limited additional defense expenses in 2026/2027.