September has confirmed the shift that markets had been anticipating over the summer. In just eight days, the Federal Reserve, the European Central Bank and the Bank of Japan all raised interest rates. Although each is responding to its own circumstances, all three share the same concern: inflation which, fuelled by rising energy prices, is proving reluctant to return to target.
The strain that in August was concentrated at the long end of the curves has this month spread to the bond market as a whole. The US 10-year Treasury yield has risen above 5.2% for the first time since 2007, while oil has once again climbed above $100 a barrel amid the lack of progress in negotiations between the United States and Iran.
United States: the Fed raises rates again and technology accounts for most of the gains
Inflation and the tightening of monetary policy set the tone for the month in the United States. Headline inflation held at 3.4% year-on-year, while core inflation eased from 2.5% to 2.4%, a divergence that points to energy as the main source of price pressure.
Against this backdrop, the Fed raised interest rates by 25bp, unanimously, in its first hike since July 2023. Kevin Warsh made it clear that inflation remains too high and that current financial conditions are not restrictive. The institution’s projections also point to further hikes: 16 of its 18 members expect at least one more before the end of the year, and the market is already pricing in a high probability of another increase at the meeting at the end of October.
The impact was felt particularly in government debt. The 10-year Treasury yield rose above 5.2%, its highest level since 2001, while the 30-year yield reached highs not seen in more than two decades. The Fed’s change of course was compounded by weak demand at some auctions and concerns over the high volume of Treasury issuance. The debt buybacks announced in August have not, for now, managed to contain the rise in yields.
Despite this environment, the large technology companies remained in the spotlight on the stock market. The S&P 500 recorded a monthly change of -0.45% and the Nasdaq of 3.23%, although the performance of the indices masks widening differences between sectors. The strength of technology contrasted with the more modest performance of the rest of the market, while the number of S&P 500 companies trading below their 50-day moving average is rising. Gains therefore rest on an increasingly narrow base, which detracts from the robustness of the market’s advance.
The rapid progress of artificial intelligence has opened up a debate on how to balance innovation and safety. Dario Amodei of Anthropic and Sam Altman of OpenAI, among others, argued for greater safeguards against the risks posed by the most advanced models and for more prudent development. The Trump Administration remains committed to accelerating the sector in order to preserve US leadership over China.
On the trade front, Xi Jinping’s state visit to the United States made it possible to ease tariff tensions, with a reduction in duties on goods worth $60 billion. The rapprochement does not appear to have extended to advanced semiconductors, on which export restrictions were maintained. Likewise, this month the US resumed its tariff war against Canada, imposing a duty of 50% on exports, a package valued at approximately $20 billion.
In currencies, the wider interest rate differential favoured a recovery in the dollar, which reached nine-week highs following the weakness seen in August. Gold gave back some of the gains built up over the summer, while Bitcoin and other cryptocurrencies advanced. Copper also performed positively, supported by improved expectations for industrial and technological demand.
Europe: the ECB raises rates and equities correct
In Europe, the central bank also took centre stage. On 10 September, the ECB raised interest rates by 25bp. This is the second hike of the year, following June’s, and was justified by the impact of the conflict in the Middle East on prices, which will keep inflation “well above target for a prolonged period”.
The data support this decision. Eurozone inflation rebounded in August to 3.3%, from 2.9% in July, its highest level of the year, with energy the main driver. Core inflation, on the other hand, remained stable at 2.4%. By country, Spain stands out, where inflation rose from 4.3% in August to 4.9% in September, well above the levels in Germany, France and Italy.
European sovereign bond yields continued to rise, with an acceleration of the move in September. Persistent inflation, tighter monetary policy and governments’ greater financing needs intensified the pressure on bonds. The yield on the German 10-year Bund approached its highest level since 2009, in an environment of ever-higher financing costs that also weighed on European equities. Of particular concern is the surge in the French 10-year yield, which reached 4.7% in September. Given the absence of budgetary or fiscal control measures ahead of the imminent general election, it seems unlikely that this will be the highest yield we see this year.
Over the month as a whole, the MSCI Europe recorded a change of -2.47%, while the Euro Stoxx 50 fell by 2.35%.
Asia: the Bank of Japan joins the hikes and China still struggles to find demand
On 18 September, the Bank of Japan raised its interest rates by 25bp, to 1.25%, their highest level since 1995. However, the decision was taken with two dissenting votes and Governor Ueda avoided committing to further hikes, which the market interpreted as dovish.
In China, the August data once again reflected a two-speed economy. On the one hand, industrial activity remained solid, with output growing by 5.2% and notable momentum in high-tech sectors, supported by rising exports of technology goods and greater investment linked to artificial intelligence. On the other, household demand and the property sector continued to perform noticeably more weakly, lagging behind the momentum of industry and technology.
Given this situation, stimulus measures were announced during the month to shore up the weakened property market. The economy ministry will subsidise mortgage interest rates by one percentage point for first-time buyers for five years, capped at CNY 1 million ($149,000) per household. This is one of the reforms designed to rebuild the sector, which collapsed in 2021 with damaging effects.
In the Middle East, Houthi attacks on Saudi energy infrastructure once again heightened tension in the crude oil markets. Damage to the East-West pipeline forced Saudi Aramco to reorganise its flows and temporarily suspend some supplies to Europe, adding to concerns over security of supply and oil price volatility.
In market terms, the MSCI China recorded a change of -4.82%, while the MSCI India moved -6.91%.
Implications for portfolios
September was a demanding month for portfolios, with equities and fixed income coming under pressure at the same time from rising interest rates. As we had been pointing out, the weeks leading up to the US midterm elections were likely to bring greater volatility, with sharp moves and frequent changes of direction. Episodes such as these put investment discipline to the test and reinforce the importance of maintaining a long-term perspective.
We continue to see strength in the US economy and in corporate earnings, although higher rates are accentuating the differences between sectors. Investment in artificial intelligence retains its momentum, while consumers are feeling the effects of more expensive credit, which helps to explain why the gains are concentrated in technology. Against this backdrop, the earnings season beginning in October will be key to seeing whether earnings support valuations and whether the momentum of AI can sustain growth in the face of weaker consumption.
Against this backdrop, following the changes made at the end of July, we are maintaining a neutral positioning in portfolios, with room to adjust exposure as the market evolves. A significant stock market correction in the run-up to the elections would lead us to increase the weighting of equities, taking advantage of more attractive valuations. If, on the other hand, the indices continue to rise until the end of the year, we would reduce exposure to lock in part of the gains.