Global Markets Weekly Wrap KW 37 : Global Stocks Rally on Fed Cut Hopes, AI Momentum, and Policy Shifts
When I look back at the past trading week across global markets, I find myself drawn first to the U.S., where the main story was one of optimism mixed with caution, with stocks climbing higher on expectations of interest rate cuts by the Federal Reserve and renewed enthusiasm surrounding artificial intelligence. The dominant mood among investors was that the Fed is likely to lower short-term interest rates when it meets on September 16 and 17, and that view alone was enough to help propel equities to new record levels. The optimism was reinforced by Oracle's announcement of a major upward revision in its guidance, driven by several large new deals linked to AI, which in turn fed the broader narrative that this technological wave is continuing to reshape the economic outlook and provide powerful tailwinds to the market.
As the week played out, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite each touched fresh record highs. Even though the Dow and S&P pulled back slightly in a relatively quiet Friday session, the fact that they had achieved those records earlier underscored the strength of the rally. The Russell 2000 Index also extended its gains, logging a sixth consecutive positive week, a sign that small-cap stocks are participating in the upward move and not being left behind. This broad participation is important because it suggests that the rally is not entirely concentrated in a narrow band of mega-cap names but is spreading out across sectors and capitalization tiers.
Yet beneath the market's celebratory tone there were reminders that the economic picture remains complicated. On Thursday, the Bureau of Labor Statistics reported that consumer prices accelerated in August. The headline consumer price index showed a year-over-year rise of 2.9 percent, up from 2.7 percent in July. The core CPI, which strips out food and energy, came in at 3.1 percent. These figures were somewhat higher than what the Fed would ideally like to see given its long-term two percent target, but they were not so alarming as to knock rate-cut expectations off course. In fact, investors appeared to interpret the inflation data as manageable, especially when set against the backdrop of weakening labor market conditions.
The producer price index told a slightly different story. Wholesale price inflation slowed to 2.6 percent in August compared to 3.1 percent the month before, although the core PPI ticked up modestly from 2.7 to 2.8 percent. These mixed signals contributed to the sense that inflationary pressures, while still elevated, are not spiraling out of control. At the same time, the labor market continues to lose momentum. Jobless claims for the week ended September 6 reached 263,000, the highest level since late 2021. In addition, the BLS revised its payroll estimates, showing that nearly a million fewer jobs were created between March 2024 and March 2025 than initially thought. That kind of revision has weight because it alters how we interpret the strength of the employment situation over the past year and strengthens the argument for the Fed to ease policy soon.
Consumer sentiment also entered the picture. The University of Michigan's preliminary September survey registered a decline, with its index falling to 55.4 from 58.2 in August. While still above the lows seen earlier this year in April and May, the drop highlighted ongoing worries among households about business conditions, the labor market, and inflation. Inflation expectations for the next year held steady at 4.8 percent, but long-run expectations ticked higher for a second month in a row to 3.9 percent. This creeping upward drift in long-term expectations is something the Fed will not ignore, since the anchoring of inflation expectations is crucial for its policy framework.
Bond markets reflected the crosscurrents in the data. Long-term Treasury yields moved lower, helping prices rise, while shorter-term yields were largely unchanged. Auctions for Treasuries during the week attracted solid demand, showing that appetite for U.S. government debt remains robust even in the face of policy uncertainty. Investment-grade corporate bonds outperformed Treasuries, and the high-yield sector also enjoyed gains, buoyed by the growing conviction that a Fed rate cut is on the horizon.
For context, the major equity indexes closed the week at notable levels: the Dow at 45,834.22, the S&P 500 at 6,584.29, and the Nasdaq at 22,141.10. All three recorded year-to-date gains well into double digits, with the Nasdaq leading the way at nearly 15 percent. Even though the S&P MidCap 400 slipped modestly, the broader tone was still positive, and the Russell 2000 posted another advance. Taken together, this data paints a picture of a U.S. equity market that is both climbing steadily and adjusting to the ongoing tug-of-war between inflation readings and labor market softness.
Moving to Europe, I saw a similar story of cautious optimism. The STOXX Europe 600 Index gained just over one percent in local currency terms, supported by the global expectation that the Fed will soon ease rates, a move that would also benefit European markets. Italy's FTSE MIB stood out with a gain of more than two percent, while France's CAC 40 also posted a strong advance of nearly two percent. Germany's DAX and the UK's FTSE 100 rose more modestly but still ended higher. The European Central Bank held its deposit rate steady at two percent, as anticipated, and President Christine Lagarde struck a reassuring tone by saying the eurozone was "in a good place" with inflation at target. At the same time, the ECB raised its forecasts slightly for both inflation and growth in the near term, which markets took as a sign that the bank might be nearing the end of its easing cycle. The ECB now expects 2.1 percent inflation in 2025 and 1.7 percent in 2026, with economic growth of 1.2 percent this year.
Still, T. Rowe Price strategist Tomasz Wieladek suggested that the market may be misreading the situation by assuming that policy easing is over. He argued there is a real chance the ECB might be compelled to cut rates once more by March 2026, especially if U.S. trade tariffs bite harder, French political turbulence worsens, or the euro appreciates further. These external factors could weigh on growth enough to force the central bank's hand. Germany offered its own mixed economic signals: exports fell by 0.6 percent in July, hurt primarily by a steep drop in shipments to the U.S., but industrial output grew by 1.3 percent, beating expectations. Factory orders, however, slumped by nearly three percent, reinforcing the sense of fragility.
The UK economy stalled in July, with GDP flat after a 0.4 percent gain in June. Weakness in manufacturing, which contracted by more than one percent, offset small gains in services and construction. This slowdown reduced the quarterly growth rate to just 0.2 percent. Meanwhile, political developments in France captured attention as President Macron appointed Sebastien Lecornu as prime minister after his predecessor lost a confidence vote, underscoring how political instability remains an undercurrent in Europe.
Turning to Japan, markets there also climbed, with the Nikkei 225 surging more than four percent and the broader TOPIX up nearly two percent. These gains came despite the announcement that Prime Minister Shigeru Ishiba will resign after his party suffered two election defeats within a year. An emergency leadership election is set for early October, and investors are keen to see whether the new leader will adopt more expansionary fiscal policies, potentially including tax cuts. Government bond yields in Japan edged up only slightly, with the ten-year yield at 1.58 percent, while the yen remained in the 147 range against the dollar. Speculation continues about whether the Bank of Japan might delay further tightening due to political uncertainty, but many still expect the bank could raise rates before year-end if growth and inflation follow its forecasts. Revised GDP data added to the positive mood, showing that the economy expanded at a 2.2 percent annualized rate in the second quarter, more than double the initial estimate, thanks largely to stronger private consumption supported by government relief measures.
In China, domestic markets continued their upward trend, with the CSI 300 and Shanghai Composite each gaining over one percent, while Hong Kong's Hang Seng advanced nearly four percent. The rally has been fueled less by earnings or economic fundamentals and more by abundant domestic liquidity, as households flush with cash seek returns in equities amid low interest rates and few other appealing investment options. AI developments and the government's "anti-involution" campaign to reduce overcapacity have also buoyed sentiment, with tech stocks leading the charge. Still, deflation remains a deep concern. The producer price index fell for the thirty-fifth consecutive month, dropping 2.9 percent year over year in August, though that was an improvement from July's 3.5 percent decline. The consumer price index also slipped into negative territory, falling 0.4 percent, underscoring how weak demand tied to the prolonged property downturn continues to weigh on the economy.
Elsewhere, Turkey's central bank made headlines by cutting its benchmark rate to 40.5 percent from 43 percent. While inflation is still running around 33 percent, the bank signaled that disinflationary forces are building, with weak demand conditions helping to cool price pressures. Officials emphasized that they will maintain a tight policy stance until inflation stabilizes more firmly. In Chile, policymakers opted to hold their benchmark rate steady at 4.75 percent, noting that while headline inflation is easing, core inflation remains stubbornly high. They also flagged that U.S. tariffs are disrupting global trade flows, complicating forecasts for activity and inflation.
Taken together, the picture that emerges is of a global financial landscape that is still wrestling with the interplay of inflation, growth, and policy responses. In the U.S., markets are riding a wave of optimism fueled by expected Fed cuts and AI's promise, but they are not blind to labor market weakness and sticky inflation. Europe is showing modest strength but remains vulnerable to political risks and trade disruptions. Japan is navigating political transition while enjoying stronger than expected growth, and China is seeing equity gains built on liquidity rather than fundamentals while continuing to fight deflation. Emerging markets like Turkey and Chile are taking different policy approaches to manage their unique inflationary challenges.
For me, what stands out most is the way investor psychology is being pulled in two directions at once. On one side there is a palpable eagerness to believe that interest rate cuts will come soon, that AI will continue to create wealth, and that consumer spending will stabilize. On the other, there are reminders in every region that vulnerabilities remain, whether in jobs data, political fragility, or structural imbalances in economies like China's. Navigating this environment requires keeping both of these realities in mind: the optimism that is driving markets higher and the cautionary signals that could reassert themselves at any time.