Economic and Market Overview
September 2025
As the Fed resumed rate cuts against a backdrop of ongoing threats to its independence, equities rose, the yield curve bull flattened and credit spreads tightened in the face of historically heavy supply.
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The S&P 500 set new all-time closing highs on eight separate occasions over the month en route to a 3.6% return for the period. Front end Treasury yields ended roughly where they started as the market witnessed the first Fed rate cut of 2025 as well as evidence of an FOMC divided on how many more cuts seemed appropriate (see below). Meanwhile, longer yields rallied as further cracks appeared in the labor market. Credit spreads tightened even as primary market activity surged. J.P. Morgan reported $212 billion in total investment-grade issuance for the month, pummeling the $133 billion average of the prior four Septembers and high yield issuance of $59 billion, a multi-year high. A rangebound month for oil ended with WTI down just 2.6%. The Dollar Index bounced off of a mid-month trough and ultimately managed to close up on the month for only the second time this year.
Economic Data
Nonfarm payrolls rose by just 22k in August, missing expectations by 53k. The release included another downward revision to the prior two months as the June result was updated to a 13k MoM decline to end a streak of 53 monthly gains. The unemployment rate ticked up 0.1% to 4.3%, as expected. Looking ahead, consensus currently calls for 52k nonfarm payrolls growth and no change in the unemployment rate when September data are scheduled to be released on October 3, though releases could potentially be impacted by the government shutdown. Consumer spending remained solid, at least according to August retail sales data which grew at a 0.7% clip, topping forecasts by 0.3%. However, both major consumer confidence indices declined for the second straight month in September. Housing data were mixed, but included a surprise 20.5% MoM jump for new home sales vs. expectations for a small decline in addition to upward revisions to the prior two months. Measures of sentiment for manufacturers and the services sector were also mixed, though tilted somewhat to the weak side. Q2 GDP was revised higher again, receiving a 0.5% boost to 3.8% in the third release as personal consumption was revised from 1.6% to 2.5%. Economists expect GDP growth to slow to a 2.0% pace for Q3.
Inflation
Although in line with expectations, CPI inflation accelerated in August. The headline figure rose by 0.38% MoM, while Core CPI rose by 0.35% with notable increases in tariff-exposed categories and services. The latter is particularly troubling if increases in rent and owners’ equivalent rent prove to be more than just a blip. Headline and core PCE inflation rose by 0.3% and 0.2%, respectively, both of which matched surveys. Inflation expectations fell across the curve as the 2-year breakeven finished 12 bps lower at 2.63%, while the 30-year break declined by 3 bps to 2.25%. The 5y/5y forward rate came in 3 bps lower to 2.31%.
Federal Reserve
The FOMC lowered their policy rate by 25 bps in September to a range of 4.00-4.25%, resuming the easing cycle that had been paused since January due to inflation concerns. The Committee was fractured by the competing stagflationary challenges of high inflation and a labor market which large revisions have revealed to be much weaker than previously understood. Despite reservations from the inflation hawks on the Committee – seven of the nineteen FOMC participants projected no further rate cuts this year – Chairman Powell was able to build a strong consensus in favor of the action. The lone dissent was dovish in nature from newly installed Governor Stephen Miran. Short rate markets are pricing two additional cuts at the remaining two meetings this year. President Trump continued his pressure campaign by firing Governor Lisa Cook, though her termination was stayed by the courts, and she continues to serve as the Supreme Court reviews her case. Financial markets have not priced much risk of a true loss of Fed independence.
Sources: Bloomberg Index Services Ltd., Bloomberg.
This overview is for informational purposes only. The information has been obtained from sources considered to be reliable, but the accuracy and completeness are not guaranteed. There is no assurance that any economic trends mentioned will continue or that any forecasts will occur. Economic data are as of the dates noted.
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