United States

U.S. equity markets experienced a turbulent but ultimately positive week, with major indexes moving in different directions as investors digested Federal Reserve commentary, fresh economic data, and ongoing debates about the durability of growth. The S&P 500 Index managed to close modestly higher, reversing losses accumulated over the first four trading sessions. The rebound was largely attributed to remarks delivered by Federal Reserve Chair Jerome Powell at the annual Jackson Hole symposium. His comments signaled that the central bank may consider lowering interest rates in the months ahead, providing a psychological lift to risk assets.

Powell’s statement that monetary policy is currently at restrictive levels was a significant acknowledgment. He emphasized that the dual challenge of containing inflation while safeguarding employment may require recalibration. In particular, he flagged two issues: weakening labor demand and the structural reduction in labor supply linked to reduced immigration. These developments, he cautioned, increase downside risks for employment, even as inflation continues to show signs of moderation. This nuanced message left markets speculating that the next policy adjustment could involve rate reductions rather than hikes.

Market Performance and Sectoral Shifts

Across equity categories, large-cap value stocks fared better than growth names, which retreated slightly after an extended rally. Energy, real estate, financials, and materials emerged as the strongest sectors, benefiting from both Powell’s policy tone and underlying demand expectations. By contrast, technology shares—particularly within the mega-cap cohort—saw notable profit-taking, as investors reassessed valuations following months of AI-driven enthusiasm.

The S&P MidCap 400 and Russell 2000 Index outperformed large-cap benchmarks, delivering impressive weekly gains. These movements suggest that investors may be rotating into smaller companies, betting that potential rate cuts and resilient domestic demand could provide a relative advantage to mid- and small-cap businesses. However, the Nasdaq Composite broke from this trend and ended the week lower, reflecting its greater sensitivity to profit-taking in technology-heavy names.

Bond Markets and Policy Sentiment

On the fixed income side, U.S. Treasuries were largely stable early in the week, but Powell’s Jackson Hole speech sparked a rally on Friday. Investors interpreted his remarks as an indication that the Fed is inching closer to an easing cycle. As a result, bond yields declined, reversing earlier hesitancy. This dynamic once again illustrated the inverse relationship between bond yields and prices. For many, the rally underscored how sensitive Treasury markets remain to forward guidance, particularly when uncertainty about inflation and growth persists.

Business Activity: PMI Surprise

Adding to optimism, preliminary August data from S&P Global’s Purchasing Managers’ Index (PMI) revealed that U.S. business activity accelerated at the fastest pace in 2025 so far. The composite index rose to 55.4, signalling robust expansion for the 31st consecutive month. The service sector index cooled slightly but remained firmly expansionary at 55.4. More significantly, the manufacturing PMI jumped to 53.3, reaching its highest level in more than three years and exceeding expectations that had forecast contraction. This surge was attributed to growing demand and precautionary inventory build-ups, as companies attempted to mitigate risks from supply chain disruptions and rising costs.

However, the PMI report also highlighted the sharpest increase in input prices since May. Tariffs were frequently cited as a major driver, pushing businesses to pass higher costs to consumers. This translated into the fastest rise in output prices since August 2022, stirring concerns that price pressures could resurface just as the Fed weighs loosening policy.

Employment Data

Labor market signals were less encouraging. Initial jobless claims rose by 11,000 to 235,000 for the week ending August 16, overshooting consensus estimates of 225,000. Continuing claims also climbed, reaching 1.972 million. These figures raised concerns that labor market resilience may be waning. Although the numbers are not yet alarming, they reflect potential cooling momentum, supporting Powell’s argument that risks to employment are becoming more evident.

Major U.S. Index Performance

Source: Reuters, Bloomberg, Yahoo! Finance. Data as of market close Friday.

Europe

European markets advanced strongly, aided by optimism that easing U.S. rates would support global liquidity. The STOXX Europe 600 Index rose 1.40% in local currency terms. Italy’s FTSE MIB was among the best performers with a 1.54% increase, while France’s CAC 40 added 0.58%. The UK’s FTSE 100 notched a record high, surging 2%. By contrast, Germany’s DAX remained mostly flat, reflecting cautious sentiment about Europe’s largest economy.

Eurozone Activity and Confidence

The eurozone economy expanded for a third consecutive month. The HCOB Flash Eurozone Composite PMI rose slightly to 51.1 in August, driven by manufacturing strength, which posted its fastest pace of growth in three and a half years. Germany extended its run of output gains, while France showed stabilization after months of contraction.

However, consumer confidence weakened, with the European Commission’s survey falling to -15.5 from -14.7 in July. This highlighted lingering worries about household spending power amid persistent cost-of-living pressures.

United Kingdom Developments

In the UK, annual inflation accelerated to 3.8% in July from 3.6% in June, marking its highest level in 18 months. The uptick was fueled by airfare and food costs, while services inflation—closely monitored by the Bank of England—rose to 5.0% from 4.7%. These numbers increase the challenge for policymakers who are attempting to balance inflation control with fragile growth.

Business activity also improved. The Flash UK PMI Composite climbed to 53.0 in August, the highest since August 2024, indicating healthy expansion led by the services sector. Meanwhile, house prices grew 3.7% year-on-year in June, reinforcing signs of resilience in the property market.

Sweden’s Riksbank Policy

The Riksbank, Sweden’s central bank, kept its policy rate steady at 2%. While inflation has remained slightly above expectations, policymakers noted the weakness in economic activity, leaving the option for additional rate cuts later this year open.

Japan

Japanese markets faced headwinds, with the Nikkei 225 down 1.72% and the TOPIX marginally lower by 0.22%. Investor sentiment was dampened by a pullback in U.S. technology stocks, which weighed on global risk appetite. The Japanese yen weakened further, slipping into the mid-158 range against the U.S. dollar. The move reflected expectations that the Fed’s policy path could diverge from Japan’s, widening interest rate differentials.

Bond yields in Japan pushed higher, with the 10-year Japanese Government Bond climbing to 1.61%, its highest since 2008. This occurred against the backdrop of rising inflation expectations. July’s core CPI increased 3.1% year-on-year, slightly above forecasts but lower than June’s 3.3%. While inflation remains well above the Bank of Japan’s 2% target, policymakers argue that underlying inflation is not yet strong enough to warrant a full policy shift. Even so, many market participants expect a rate hike later this year, possibly as early as October.

On the trade front, Japan’s exports fell 2.6% year-on-year in July, a sharper decline than expected. The weakness was driven by reduced shipments of autos, auto parts, and semiconductors to the U.S. Tariff effects and soft overseas demand also weighed on performance. Imports contracted 7.5% year-on-year, less than expected, but still underscoring weaker trade momentum.

China

Mainland Chinese markets posted strong gains, buoyed by improved U.S.-China trade sentiment and robust retail participation. The CSI 300 Index advanced 4.18%, reaching a decade-high close, while the Shanghai Composite Index rose 3.49%. In Hong Kong, the Hang Seng Index gained 0.27%.

The rally was largely retail-driven, with households increasingly turning to equities as an alternative to low-yield bank deposits. Bloomberg reported that margin debt used to purchase shares rose to its highest level since 2015, only 10% below all-time peaks. This trend highlights both bullish enthusiasm and elevated risk-taking within domestic markets.

Other Markets

Romania: Inflationary Pressures

Romania experienced a sharp rise in inflation in July, with consumer prices climbing 7.84% year-on-year, compared with 5.66% in June. The surge followed the removal of electricity price caps and was further amplified by preemptive price hikes from producers and retailers ahead of new tax increases scheduled for August. This unexpected jump in inflation is likely to keep the central bank cautious. Policymakers have held the benchmark interest rate at 6.50% since last year’s quarter-point cut and may prefer to wait for clearer evidence of stabilization before resuming easing.

Peru: Stable Policy Outlook

In Peru, the central bank left its reference rate unchanged at 4.50% during its latest meeting. Inflation remained steady at 1.7% in July, in line with June’s reading. Officials expressed confidence that core inflation will hover around 2% and noted that most business sentiment indicators remain in optimistic territory. Economic activity is estimated to be running close to potential, allowing policymakers to adopt a steady policy stance.