Macro
Fed Chair Jerome Powell signalled a potential rate cut in September during his Jackson Hole remarks, triggering a strong rally in equities, bonds, and even Bitcoin. The key key sentence in Fed Chair Powell’s Jackson Hole speech: “with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”
Powell emphasised that the balance of risks has shifted, suggesting the Fed is moving closer to easing policy as growth slows and labour market conditions soften. He reiterated the Fed’s dual mandate, noting that inflation remains above target, partly due to tariff-driven one-off price shocks, but stressed that these effects are likely to be temporary rather than the start of a sustained inflation trend. Importantly, Powell highlighted that both labour demand and supply are weakening, which aligns him more closely with the dovish members of the FOMC. Traders responded quickly, with futures pricing in a 90% probability of a September cut and now expecting two 25 bps cuts by year-end.
Despite these policy signals, the U.S. economy has slowed materially in the first half of the year. Real core GDP expanded just 1.5% in Q1 and 1.2% in Q2, while payroll growth nearly stalled in May and June. July hiring showed a modest rebound, but it was not enough to offset labour force growth. Consumer spending improved slightly in July, yet uncertainty remains over whether the earlier weakness was a temporary response to tariffs and policy uncertainty or the start of a more sustained cyclical slowdown.
The pace of monthly job creation has been falling steadily since the pandemic peak, reflecting a gradual cooling of the labour market. The economy added an average of 380K jobs per month in 2022, slowing to 216K in 2023 and 168K in 2024. Following recent payroll revisions, 2025 shows an average of just 85K jobs per month, highlighting a sharp loss of momentum. If the current three-month pace of around 35K new jobs per month persists, the unemployment rate is expected to rise toward 3.5%. However, the National Bureau of Economic Research notes that the natural replacement rate has dropped significantly, from roughly 100K jobs during the pandemic to just 10K to 15K today, reflecting slower labour force growth.
On the global stage, monetary policy is shifting towards easing across most major economies, reinforcing the downward pressure on U.S. yields. The People’s Bank of China and Swedish Riksbank kept rates steady but signalled readiness to cut later this year, while the Reserve Bank of New Zealand and Bank Indonesia have already reduced rates and hinted at further moves. The Bank of Japan remains the outlier, signalling potential policy normalisation and modest tightening. Overall, the global trend remains accommodative, even as governments face higher borrowing costs in bond markets.
Recent data suggest that global growth remains resilient despite the uncertainty surrounding tariffs. August flash PMIs surprised to the upside, with the U.S. manufacturing PMI rebounding to 53.3 from 49.8 and services holding steady at 55.4, signalling continued expansion. India posted the strongest momentum, with manufacturing at 59.8 and services at 65.6, while the Eurozone PMIs stabilised and Japan’s manufacturing activity improved slightly. Inflation dynamics are mixed: U.S. surveys indicate that consumer price inflation may already be running above 3%, slightly higher than official readings, while Eurozone inflation remains stable at 2%. Japan, Canada, and Mexico are also seeing signs of mild disinflation.
The fiscal backdrop in the U.S. has also improved slightly. S&P reaffirmed the U.S. government’s AA+ credit rating and lowered its budget deficit forecast to 6% of GDP for FY2025/26, down from 7.5% in 2024, citing stronger tariff revenues partially offsetting higher spending and extended tax cuts. This development provides the Fed with slightly more flexibility to adjust policy without worsening near-term fiscal risks.
The housing market remains a critical focus given its outsized influence on the broader economy and financial stability. Residential investment accounts for roughly 3.8% of GDP, housing services represent about 12.2%, and together, housing contributes around 16% of total GDP. Additionally, approximately 8 million jobs are directly tied to housing-related industries, underscoring its systemic importance. Elevated mortgage rates have already slowed housing activity, and stress in this sector could spill over into credit markets, tightening financial conditions further. Powell’s Jackson Hole remarks may signal the first acknowledgement that the restrictive policy stance has largely run its course, which could support housing demand and help stabilise one of the economy’s most sensitive sectors.
Key releases next week include July new home sales (Mon), durable goods, consumer confidence, and the Richmond Fed Index (Tue), pending home sales (Thu), and July PCE inflation (Fri). Fedspeak features Logan and Williams (Mon), Barkin (Tue–Wed), and Waller (Thu).
Rates
Two-year Treasury yields dropped 12 basis points, marking their sharpest single-day decline since May, as markets reacted to Powell’s dovish tone at Jackson Hole. Powell indicated that the Fed’s latest policy “reset” reflects a shift in the balance of risks, with growing concerns around slowing growth and a softening labour market.
Markets were driven by several competing forces, with the Fed’s policy path taking centre stage. Fed Chair Jerome Powell’s Jackson Hole remarks confirmed that policy remains restrictive but hinted at potential easing later this year. Investors now assign a ~90% probability to a September rate cut, up from 65% before the speech, and expect two 25 bps cuts by year-end. Meanwhile, S&P Global flash PMIs surprised to the upside, with manufacturing at a three-year high and hiring accelerating at the fastest pace in the same period. Debate remains over whether the Fed opts for a “hawkish” one-off cut to recalibrate policy or initiates a broader easing cycle if economic softness deepens.
Ultimately, risks remain nuanced. Rising inflation compensation could push long-dated yields higher, especially as the large supply of Treasuries challenges foreign demand. While last week’s $8B auction of 30-year TIPS saw the strongest demand since 2017, it also cleared at the highest yield since 2001, highlighting investor caution despite appetite for inflation protection. Next week, supply will be in focus with auctions of $73B in 2Y notes (Tue), $75B in 5Y (Wed), and $47B in 7Y (Thu).
Looking ahead, the market narrative is shifting from Powell’s near-term actions to the expected transition to a new, likely more dovish, Fed Chair early next year. This supports positioning long in the belly of the curve, as front-end easing combines with structural forces keeping long-term yields elevated. The U.S. yield curve is showing early signs of steepening, with front-end yields falling sharply on easing expectations, while the long end remains anchored by concerns over deficits and foreign demand dynamics. Analysts expect this gradual normalisation to persist into 2026. With two cuts already priced in, upcoming payrolls and activity data will be pivotal in determining whether the economy is heading into a deeper slowdown or navigating a temporary soft patch. Until greater clarity emerges, maintaining a cautious positioning bias remains appropriate.
Credit
Credit markets remain resilient despite macro uncertainty and elevated yields. The economic backdrop for U.S. corporates is solid, with stable cash flows, manageable leverage, and open capital markets ready to refinance upcoming maturities. While issuance briefly paused during the opening day of Jackson Hole, investment-grade supply still reached $21B, exceeding forecasts and reflecting continued demand. In high-yield, activity slowed seasonally, but August remains on track to be the busiest month since 2021, supported by strong investor appetite for yield.
Default risks are expected to rise modestly, particularly in leveraged loans where defaults hover around 6%, but overall corporate health remains robust. Risk premiums are likely to widen slightly, yet refinancing conditions are supportive, limiting systemic stress. Capital markets remain open, allowing firms to issue or roll over debt without significant pressure, keeping credit metrics broadly stable.
From a positioning standpoint, credit offers a compelling risk-reward profile. Although spreads over Treasuries are narrower than in past cycles, contractual yields around 7.5% remain historically attractive, especially against elevated equity valuations and expectations of declining rates. Investors are tilting portfolios defensively toward credit over equities, while European credit markets present additional relative value opportunities, albeit requiring a selective approach.
Equities
U.S. equities ended the week mixed. The Dow Jones gained 1.53%, the S&P 500 added 0.27%, while the Nasdaq slipped 0.58%, marking its first weekly decline in three weeks. Small caps outperformed sharply, with the Russell 2000 up 3.30%, its strongest week since early July. With rate-cut expectations firming, equity performance is likely to remain highly sensitive to incoming macro data and evolving narratives around AI investment, consumer strength, and fiscal dynamics.
However, broader macro signals remain mixed. There is clear evidence that hiring freezes and an investment slowdown have extended into Q3, yet equity markets have largely disregarded these signs of weakening economic momentum. From another perspective, the U.S. remains at the forefront of the AI-driven technological revolution, arguably the most important in decades, which continues to shape long-term growth expectations despite near-term economic softness.
Sector leadership was uneven. Energy (+2.81%), Real Estate (+2.42%), Financials (+2.14%), and Materials (+2.12%) led the gains, while Industrials (+1.78%), Healthcare (+1.44%), and Consumer Discretionary (+1.28%) also advanced. On the downside, Technology (-1.60%) and Communication Services (-0.88%) lagged, weighed down by weakness in large-cap tech.
SaaS stocks have faced sustained pressure despite strong earnings. Datadog (DDOG), Dynatrace (DT), HubSpot (HUBS), and Atlassian (TEAM) have all traded lower, with the Software vs. NDX RSI now deeply oversold. This reflects investor concerns that AI could disrupt traditional SaaS models by reshaping pricing structures, lowering entry barriers for challengers, and compressing profit margins.
Yet fundamentals remain intact. Leaders such as Salesforce (CRM), ServiceNow (NOW), Snowflake (SNOW), and Adobe (ADBE) are embedding hybrid AI strategies, combining proprietary domain-specific models with integrations to external LLMs, while transitioning from subscription-only to outcome-based pricing to capture productivity gains. Adobe is targeting $250M in AI ARR by end-2025, and HubSpot has reported a 3x surge in AI adoption rates, underscoring successful monetisation.
While near-term volatility may persist, AI is more likely to expand the SaaS opportunity than erode it. Goldman Sachs projects a larger combined SaaS and AI-agent TAM by 2030, with incumbents and AI-native players expected to coexist rather than face wholesale disruption. The recent pullback in valuations may offer attractive entry opportunities, but with the rapid pace of AI innovation and uncertainty around business model impacts, investors should remain cautious on elevated multiples.