Global Markets Weekly Wrap KW 34 : Global Markets React as Fed Signals Possible Rate Cuts Ahead

Global Markets Weekly Wrap KW 34 : Global Markets React as Fed Signals Possible Rate Cuts Ahead 

When I look back at the last trading week in the United States, it becomes clear that the market went through a cycle of hesitation, nervous selling, and finally a sense of relief that arrived late on Friday. The S&P 500, which had been struggling for four straight sessions, finally managed to rally on the last day of the week, closing a touch higher. That change in momentum was not random; it came on the heels of remarks delivered by Federal Reserve Chair Jerome Powell at the much-watched symposium in Jackson Hole, Wyoming. His speech, carefully crafted and delivered with the kind of caution one would expect from the head of the U.S. central bank, signaled something investors had been hoping for all summer: the possibility of upcoming interest rate cuts. That alone was enough to lift sentiment across the equity market and allow certain sectors to stand out. Energy names, real estate firms, banks, and materials stocks enjoyed the largest gains, showing that areas more tied to the real economy than to speculative growth were leading the rebound. In that sense, it was also no surprise that large-cap value companies outperformed their growth peers, many of which lost ground.

Beyond the big board names, mid-caps and small-caps also showed strength. The S&P Mid-Cap 400 Index as well as the Russell 2000 Index posted solid advances, suggesting that breadth was improving and investors were willing to take on some exposure beyond the giants of the market. However, the Nasdaq Composite could not shake off its weakness, finishing the week lower. A fair interpretation is that many traders decided to lock in profits after the impressive run in technology stocks, especially those connected to artificial intelligence infrastructure spending. The market has started to question whether this extraordinary level of investment can really be sustained without hitting limits in supply chains, margins, or simply demand growth that might not keep pace with the narrative. That unease translated into weakness for the tech-heavy index, even as other parts of the market bounced.

Meanwhile, the Treasury market was experiencing its own turbulence. Heading into Friday morning, U.S. government bonds had been relatively flat, producing little excitement. Then Powell's speech landed, and suddenly there was a spark. The idea that rates might come down sooner rather than later triggered a rally in Treasuries, which meant yields moved lower, reminding us once again of the inverse relationship between bond prices and yields. What this rally really showed is that investors are trying to position themselves for a shift in policy, one that could alter the economic landscape going into the next year.

Powell's annual address in Jackson Hole was revealing not only for what he said but also for the tone he adopted. He acknowledged the challenge of balancing the Federal Reserve's dual mandate: on one hand containing inflation, and on the other maximizing employment. The truth is that the inflation fight has been intense, but now signs of weakness in the labor market are becoming harder to ignore. Powell noted that rates are already in restrictive territory, which by itself is an admission that monetary conditions are tight enough to cool the economy. He went further, suggesting that risks are now tilting in such a way that an adjustment in policy could soon be justified. Particularly interesting was his view on labor market dynamics: weak labor demand combined with declining labor supply—partly due to lower immigration—creates a scenario where downside risks to employment are rising. That kind of language opens the door for the central bank to justify cutting rates if job losses begin to mount even while inflation stays above target.

Economic data released during the week also fed into this shifting narrative. A flash reading of the S&P Global U.S. Purchasing Managers Index pointed to business activity growing at the fastest pace so far this year. The composite PMI came in at 55.4, comfortably above the 50 line that separates expansion from contraction. This marked the thirty-first straight month of expansion, a streak that signals resilience in the U.S. economy despite all the headwinds. The services sector slowed slightly from July, posting 55.4 compared with the previous 55.7, but manufacturing was the real surprise. Manufacturing PMI surged to 53.3, the highest level in thirty-nine months and well above consensus estimates, which had predicted continued contraction. Clearly, demand expectations and the desire of firms to build inventories are driving output higher. However, this good news was tempered by an equally important development: input prices climbed at the fastest rate since May, with tariffs blamed for higher costs. Businesses did not absorb these increases quietly; they passed them along to customers, leading to the fastest rise in prices charged for goods and services since August 2022. In other words, while activity is accelerating, inflationary pressures are creeping back into the system.

The labor market data offered yet another angle on the economy's state. New unemployment claims rose to 235,000 in the week ending August 16, which was higher than both the previous week's 224,000 and the economist forecast of 225,000. Continuing claims also ticked higher, reaching nearly two million. These numbers are not catastrophic, but they do indicate some softening. For an economy that has relied on a robust labor market as a key pillar of its resilience, any sustained weakening would carry significant implications for consumer spending and overall growth. Powell's reference to labor market risks becomes even more understandable in light of these statistics.

The market data at week's end told its own story. The Dow Jones Industrial Average closed at 45,631.74, up nearly 686 points for the week, marking a gain of more than seven percent year to date. The S&P 500 finished at 6,466.91, modestly higher for the week and nearly ten percent up on the year. The Nasdaq Composite closed lower at 21,496.54, trimming some of its impressive annual gain, which still stands above eleven percent. The S&P MidCap 400 and the Russell 2000 both rose solidly, up more than four and nearly six percent respectively for the year. These figures remind us that despite the volatility of individual sessions and sectors, the broader U.S. market remains in positive territory and has rewarded investors in 2025 so far.

Looking across the Atlantic, Europe shared in some of the positive energy generated by expectations of lower U.S. borrowing costs. The pan-European STOXX 600 rose 1.4 percent, with Italy's FTSE MIB and France's CAC 40 both gaining, though Germany's DAX was little changed. The UK's FTSE 100 hit a record high with a two percent increase. Business activity in the eurozone expanded for the third straight month, with manufacturing leading the way to its fastest growth in three and a half years. Yet consumer confidence slipped, suggesting households remain cautious. In the UK, inflation accelerated, climbing to 3.8 percent in July, driven largely by food and airfare, with services inflation at a concerning five percent. Business activity nevertheless picked up, led by services, and housing data showed rising prices, pointing to an economy that remains mixed but still alive with momentum. Sweden's Riksbank held its rate steady at two percent, leaving the door open for a cut later in the year as it tries to balance stronger-than-expected inflation against weaker economic growth.

Turning to Asia, Japan struggled as the Nikkei 225 dropped by more than 1.7 percent and the broader TOPIX slipped slightly. Investor sentiment there was influenced heavily by the pullback in U.S. technology stocks, which dampened risk appetite globally. The yen weakened against the dollar, and Japanese government bond yields rose to their highest level since 2008 after hotter inflation data rekindled speculation that the Bank of Japan might hike rates again before the end of the year. Inflation in July reached 3.1 percent, still above the two percent target, though down from June's 3.3 percent. Exports, however, continued to fall, hit by U.S. tariffs and weaker demand from major partners including China and the EU. Imports declined as well, though not as sharply as expected, underscoring the difficult trade environment facing Japan.

China offered a sharp contrast, with its mainland stock markets surging. The CSI 300 jumped over four percent, closing at its highest in a decade, while the Shanghai Composite climbed more than three percent. Hong Kong's Hang Seng rose modestly. Retail investors are driving this rally, flush with cash in a low-interest-rate environment and lacking attractive alternatives. Margin debt used to buy stocks has climbed close to record highs, echoing patterns last seen in 2015. Whether this rally proves sustainable will depend on both domestic fundamentals and the delicate balancing act of U.S.–China trade relations, which appear to have stabilized somewhat in recent weeks.

Even smaller markets added to the global mosaic of economic developments. Romania reported inflation at nearly 7.9 percent in July, up from 5.7 percent in June, driven by the end of electricity price caps and anticipated tax hikes. This unexpected surge makes it likely the central bank will keep its policy rate unchanged for now. Peru's central bank also held its rate steady at 4.5 percent, noting that core inflation is stable around two percent and that overall economic activity remains near potential levels.

What stands out from all these developments is a world economy still in flux, where policy decisions remain central to market performance. In the U.S., Powell's speech gave investors a reason to believe that rate relief may be coming, but it also highlighted the fragility of the labor market and the persistence of inflation. In Europe, growth is slowly returning in manufacturing while consumers remain cautious, and in the UK inflation is proving stickier than policymakers would prefer. Japan faces the delicate task of adjusting ultra-loose monetary policy while keeping its economy stable in the face of trade challenges. China is riding a wave of retail speculation, which could either reinforce momentum or set the stage for another correction if enthusiasm fades. Emerging markets are responding to their own domestic pressures, from inflation shocks to cautious central bank policies. The common thread is uncertainty, with markets constantly recalibrating to new signals from central banks, data releases, and geopolitical developments.

This interconnectedness ensures that no market moves in isolation. A hint of a policy change in the U.S. can ripple through Europe, sway currencies in Asia, and alter capital flows in emerging economies. That is exactly what happened last week. Investors were reminded that while central bankers may speak carefully, markets respond quickly and sometimes dramatically. The week began with hesitation and weakness, but by its close, Powell's remarks had shifted the tone, providing enough optimism to carry equity indexes higher and rekindle hopes that the economic cycle still has room to run. Whether those hopes are justified will depend on the data that comes next, on how inflation evolves, on whether job markets hold steady or soften further, and on whether global trade tensions ease or re-emerge. For now, the narrative has tilted slightly more positive, but as ever, the markets remain poised between fear and optimism, waiting for the next clue.