Economic and Market Overview
August 2025
Federal Reserve officials increasingly signaled an imminent rate cut as employment data disappointed. Equity markets powered ahead, but credit spreads ultimately failed to follow suit and the yield curve steepened due in part to concerns over threats to the independence of the U.S. central bank.
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While the S&P 500 fell on the final trading day of August, it closed at a new all-time high a day earlier ultimately returning 2.0% for the month. Small caps fared much better as the Russell 2000 returned 7.1%. Treasury yields rallied at the front end and sold off at the tip of the curve as cracks appeared in the labor market and the Fed’s independence faced increasing threats from the White House (see below). Intermediate credit spreads widened and long spreads finished where they started but only after the average OAS on the Bloomberg Long Credit Index touched 90 bps for the first time since the 1990s. J.P. Morgan reported $99 billion in total investment-grade issuance for the month, 6% over the average of the prior four Augusts. Oil fell as the summer driving season came to an end and OPEC+ accelerated increases in output. The Dollar Index posted its seventh monthly decline in eight chances this year, falling by 2.2%.
Economic Data
The month began with a bombshell when nonfarm payrolls rose by just 73k. This reflected a 31k miss, but more disappointing news arrived via 258k in net downward revisions to the prior two months marking the largest such adjustments since March/April 2020. The unemployment rate was less disappointing as its 0.1% increase to 4.2% was in line with consensus. Economists predict that August nonfarm payrolls growth will come in at a 75k rate and the unemployment rate will tick up by 0.1% when data are released on September 5. Early in the summer, consumers did not seem fazed, at least according to retail sales data, as July figures were broadly in line with consensus and prior months were revised higher. Looking ahead, however, both major consumer indices indicated more confidence about present conditions versus expectations. Measures of sentiment for manufacturers and the services sector were mixed, as were housing data. U.S. GDP’s Q2 rebound from Q1’s 0.5% decline was revised 0.3% higher to 3.3% according to the second release, as the contributions of both personal consumption and business fixed investment were upsized. Forecasters expect around a 1.5% rate for Q3.
Inflation
Core CPI rose 0.3% in July, in line with expectations of the highest monthly pace since January and the second highest in the prior 16 months. Although tariffs still influenced the data, it was at a slightly slower pace than in the prior month and instead driven mainly by services. Producer Price Index data came in red hot as the headline and core indices jumped by 0.9% MoM, both of which were 0.7% over surveys. Headline and core PCE inflation rose by 0.2% and 0.3%, respectively, both of which matched surveys. Inflation expectations increased for the near term as 2- and 5-year breakevens finished 11 and 4 bps higher at 2.75% and 2.52%, respectively, while longer tenors barely budged.
Federal Reserve
The FOMC did not meet during August as they decamped for their usual Jackson Hole conference. Communications generally leaned dovish after July’s payrolls report, and Chairman Powell’s keynote speech in Wyoming raised expectations for a 25-bp rate cut at the next meeting in September. As tariffs pass through to prices more slowly than expected, a majority of FOMC officials have seemingly judged that the downside risk to the labor market has risen enough that they no longer have the luxury of waiting for clarity on the inflationary effects. As of month end, short rate markets were pricing slightly more than two 25-bp rate cuts over the three remaining 2025 meetings. Overshadowing the routine debate about the near-term monetary policy outlook, the Trump administration escalated its attacks against the central bank by accusing Governor Lisa Cook of mortgage fraud and attempting to remove her from office.
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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