United States

Market Sentiment Softens on Hawkish Fed Rhetoric

The major U.S. equity benchmarks finished the week in negative territory as investors reacted to a mix of hawkish commentary from Federal Reserve officials. These remarks were widely interpreted as a sign that policymakers may not move as quickly as markets had hoped toward cutting rates. Among the large indexes, the Nasdaq Composite lagged, slipping 0.65%. The Russell 2000 Index, which had managed to post gains for several consecutive weeks, broke its streak and recorded its first weekly decline since early August. Both the S&P MidCap 400 and the S&P 500 Index declined, while the Dow Jones Industrial Average ended almost flat, reflecting muted conviction across the market.

Sector performance varied. Energy shares advanced noticeably, fueled by rising oil prices after President Donald Trump publicly urged the European Union to halt purchases of Russian oil and gas. Outside of the energy sector, however, most industries within the S&P 500 experienced broad-based weakness, signaling reduced risk appetite among investors.

Fed Officials Temper Market Optimism

The cautious tone of Fed communications was a key factor behind the week’s risk-off sentiment. Chair Jerome Powell stated that the U.S. economy was in a “challenging situation,” pointing to upside risks for inflation alongside vulnerabilities in the labor market. Powell also acknowledged that equity valuations appeared stretched, raising concerns about excessive speculation. Other officials echoed this stance: St. Louis Fed President Alberto Musalem and Atlanta Fed President Raphael Bostic both warned against premature policy easing, citing persistently high inflationary pressures. Their hawkish rhetoric cooled expectations for imminent monetary stimulus, reinforcing the perception that policymakers intend to keep financial conditions tighter for longer.

Inflation and GDP Data: Stable Prices, Stronger Growth

Economic releases provided a mixed picture but generally underscored resilience. The Bureau of Economic Analysis reported that core personal consumption expenditures (PCE)—the Fed’s preferred inflation gauge excluding food and energy—rose 0.2% in August, consistent with both forecasts and July’s revised number. On a year-over-year basis, core PCE climbed 2.9%, identical to July’s figure. Meanwhile, personal spending and incomes beat expectations modestly, rising 0.6% and 0.4%, respectively.

The BEA also released its third estimate of second-quarter GDP, revising growth upward to an annualized 3.8% from 3.3% previously. The stronger reading was primarily driven by consumer activity, which remained robust despite elevated borrowing costs.

Business Activity: Expansion Slows but Persists

S&P Global’s flash PMI surveys highlighted ongoing growth momentum, albeit at a slower pace. The Manufacturing PMI registered 52.0 in September, down from 53.0 in August but slightly above expectations of 51.9. Services activity softened as well, with the Services PMI slipping to 53.9 from 54.5, a decline in line with forecasts. Importantly, business outlook for the year ahead improved, reaching the most optimistic level in four months.

According to Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, “further robust growth of output in September rounds off the best quarter so far this year.” The survey data suggested that U.S. GDP could expand at a 2.2% annualized pace in Q3.

Housing Sector: New Home Sales Surge

Housing market data reflected renewed strength. The Census Bureau reported that new single-family home sales rose by more than 20% from July to reach an annualized 800,000 units in August—the highest since January 2022 and far surpassing consensus estimates of 650,000.

Existing home sales, reported by the National Association of Realtors, remained broadly stable at an annualized 4 million units, edging 0.2% lower from July but slightly better than expected. Prices continued to climb, with the median existing-home price up 2% year-over-year to $422,600, marking 26 consecutive months of annual gains.

Treasury Market: Shorter Yields Edge Up

U.S. Treasuries generated negative returns, as yields on short- and intermediate-term securities moved higher, while long-term yields remained little changed. The adjustment reflected waning expectations for near-term Fed rate cuts, influenced both by hawkish commentary and stronger-than-expected economic releases.

Major Index Performance

Source: Reuters, Yahoo! Finance, Bloomberg.

Europe

Mixed Equity Results Amid Policy Uncertainty

In Europe, the STOXX Europe 600 Index ended largely flat as investors weighed interest rate prospects and renewed trade concerns. Major national indexes were modestly higher: Italy’s FTSE MIB rose 0.79%, Germany’s DAX gained 0.42%, France’s CAC 40 edged up 0.22%, and the UK’s FTSE 100 advanced 0.74%.

Business Activity Trends

Survey data pointed to diverging dynamics. The eurozone composite PMI reached 51.2 in September, a 16-month high, driven by robust services activity, though manufacturing slowed. Optimism for future output remained intact, but confidence in the industrial sector weakened.

The UK, in contrast, saw its PMI fall from 53.5 to 51.0, signaling slower momentum. Services cooled, and manufacturing output fell at the sharpest pace since March, partly due to auto industry disruptions. Business sentiment fell to its weakest level since June, reflecting uncertainty ahead of the November budget.

Confidence and Central Banks

Germany delivered mixed survey results: the Ifo Institute reported a sharp deterioration in business confidence, while GfK’s consumer sentiment survey showed households somewhat less pessimistic.

In monetary policy, Sweden’s Riksbank lowered its key rate by 25 basis points to 1.75%, its third cut this year, bringing rates to their lowest since 2022. Meanwhile, the Swiss National Bank kept its benchmark rate at 0% as inflation fell back within target at 0.2%.

Japan

Japanese equities posted weekly gains, with the Nikkei 225 up 0.69% and the TOPIX rising 1.25%. Market optimism about corporate earnings and economic resilience was partially balanced by subdued inflation data from Tokyo, which came in below expectations.

Bond yields continued to hover near multi-year highs, with the 10-year Japanese government bond yield inching up to 1.64%. The yen weakened to around JPY 149.7 per U.S. dollar, pressured by political uncertainty tied to the LDP’s leadership race and a stronger U.S. dollar.

Tokyo’s consumer price index rose 2.5% in September, unchanged from August but below consensus forecasts of 2.8%. The softness, largely due to temporary subsidies, dampened expectations for imminent Bank of Japan tightening. However, minutes from the July meeting reaffirmed the BoJ’s readiness to raise rates should its forecasts for economic activity and inflation be realized.

China

Mainland markets advanced modestly, with the CSI 300 Index up 1.07% and the Shanghai Composite rising 0.21%. In contrast, Hong Kong’s Hang Seng Index retreated 1.57%.

No major economic releases were published, leaving liquidity-driven momentum as the primary market driver. Ample domestic cash has supported equity gains since April, as investors searched for higher yields in a low-rate environment. Optimism was further boosted by progress in domestic artificial intelligence companies and Beijing’s campaign to curb excessive price competition. These developments lifted sentiment despite concerns over slowing growth and deflationary pressures.

Other Key Markets

Hungary

The National Bank of Hungary kept its policy rates unchanged: the base rate at 6.50%, the lending facility at 7.50%, and the deposit rate at 5.50%. Policymakers acknowledged both global uncertainty and modest domestic recovery, with household consumption lifting GDP. Inflation was 4.3% in August, with core inflation at 3.9%. Officials stressed that tight monetary policy would remain necessary, as risks skewed toward higher inflation and weaker growth.

Czech Republic

The Czech National Bank also left rates steady, maintaining its two-week repo rate at 3.50%, alongside a discount rate of 2.50% and a Lombard rate of 4.50%. Policymakers emphasized that inflationary pressures remained elevated, particularly in services and property. Headline inflation in August stood at 2.5%, with core at 2.8%. The labor market stayed tight, with wages rising nearly 8% year-over-year, justifying the continuation of a restrictive stance.