Will AI euphoria start to fade in Q4?

Markets in September

US equities markets extended their rally driven by investors’ relentless enthusiasm for AI. The S&P 500 was +3.53% in September, the Dow Jones was +1.87% , and the Nasdaq 100 +5.40%. European equity markets had a positive month with the STOXX 600 +1.46% for September.

In the bond market, long-dated global yields retreated from their peaks in September. The dollar was -0.06% MTD for September and is down -9.94% YTD.

The economic picture

USA. In September, US economic data painted a picture of both resilience and emerging headwinds across manufacturing, consumer sentiment, inflation, and labour markets.

The FOMC September meeting resulted in a widely anticipated 25 bps rate cut, with only one member dissenting. The statement took a more dovish tone, referencing a weaker labour market and projecting a total of 75 bps in rate cuts for 2025. Fed Chair Powell called the move ‘risk management’ and noted the labour market was showing clear signs of cooling.

The manufacturing sector offered mixed signals. The ISM Manufacturing Index improved to 49.1, its highest point since February 2025, and better than both the consensus estimate of 49.4 and August’s 48.7. Despite this uptick, the sector remained in contraction territory, as a reading below 50 signifies a decline. The new orders index fell to 48.9 from 51.4, suggesting a slowdown in order volumes. However, production saw a modest rebound, with its index climbing to 51.0 from 47.8, signaling slight expansion. Employment within manufacturing also improved, rising to 45.3 from 43.8, though it too remained below the expansion threshold. Input cost pressures appeared to ease, as the prices index declined to 61.9 from 63.7. External demand weakened significantly, with the new exports index sliding to 43.0 from 47.6. Survey respondents were predominantly cautious, citing tariffs as the main factor clouding their outlook and sentiment. Additional challenges included subdued demand and customers postponing or canceling orders.

Similarly, the S&P Global US Manufacturing PMI for September confirmed both growth and moderation. The final reading came in at 52.0, down from 53.0 in August but in line with expectations. The report highlighted that output and new orders continued to expand, albeit at a slower pace. Tariffs remained a persistent headwind, driving up input prices, though overall cost inflation pressures softened compared to August. Output price inflation eased to its lowest level since January. Notably, employment within manufacturing increased solidly.

On the consumer side, confidence and sentiment weakened. The Consumer Confidence Index dropped to 94.2, missing expectations of 96.0 and falling from 97.8 in August. Views on the labour market softened: only 26.9% of respondents said jobs were ‘plentiful,’ down from 30.2%, while 19.1% said jobs were ‘hard to get,’ unchanged from the previous month. The Present Situation Index saw its largest monthly decline in a year, falling to 125.4 from 132.4, and the Expectations Index edged down to 73.4 from 74.7. The final September US consumer sentiment reading from the University of Michigan registered at 55.1, below both the consensus of 55.9 and August’s 58.2. Short-term inflation expectations eased slightly, while long-term expectations rose for a second consecutive month. The year-ahead inflation expectation settled at 4.7%, just below prior levels, while long-term expectations increased to 3.7%. The Current Economic Conditions Index slipped to 60.4 from 61.7, and the Consumer Expectations Index fell to 51.7 from 55.9. Notably, 44% of households reported that high prices were eroding their finances, the highest proportion in a year.

Business activity growth, as measured by the S&P Global PMI Composite, also decelerated. The flash reading for September was 53.6, below the consensus forecast of 54.9 and the prior month’s 55.4. The Manufacturing PMI posted 52.0, while the Services PMI registered 53.9. Both sectors continued expanding, but at a slower rate, which contributed to a reduced pace of hiring. Tariffs were widely cited as a major factor driving up costs. While manufacturing input prices saw a slight decrease, the service sector’s cost inflation hit its second-highest level in the past 27 months. Businesses reported increasing difficulty in passing higher costs on to customers.

Inflation data for August showed a mixed picture. Core Personal Consumption Expenditures (PCE) rose by 0.2% m/o/m, matching both consensus and the prior month. This marked the fifth consecutive monthly increase, with the annualised core PCE up 2.9%, in line with expectations. Headline PCE rose 0.3% m/o/m, bringing the annualised rate to 2.7%, slightly above July’s 2.6%. Personal spending grew 0.6% m/o/m, outpacing forecasts, while personal income increased 0.4%.

Durable goods orders rebounded sharply in August, jumping 2.9% m/o/m compared to expectations for a 0.5% decline, reversing July’s revised 2.7% drop. The main driver was transportation equipment. Excluding transportation, orders rose 0.4%, and core orders (non-defence, ex-aircraft) gained 0.6%.

Inflation, as measured by the Consumer Price Index (CPI), showed core CPI rising 0.3% m/o/m in August, matching expectations and the prior month, while headline CPI increased 0.4%, slightly above consensus. On an annualised basis, core CPI was up 3.1% and headline CPI 2.9%. Shelter costs were the largest contributor to headline inflation, while tariff-influenced categories like apparel and vehicles also contributed. The core Producer Price Index (PPI) unexpectedly declined by 0.1% m/o/m, with annualised readings for core and headline PPI coming in softer than forecast.

Labour market data revealed ongoing softness. The Bureau of Labor Statistics’ annual revision to nonfarm payrolls showed a downward adjustment of 911,000 jobs for April 2024 to March 2025. August payrolls rose by only 22,000, far below expectations, with previous months’ revisions mixed. The unemployment rate ticked up to 4.3%, while average hourly earnings increased by 0.3%. Job creation was mostly concentrated in health care and social assistance, with losses in sectors such as manufacturing and government. Manufacturing employment fell by 12,000 in August and is down 78,000 over the past year, signaling continued pressure in industrial hiring.

EU. The 10^th - 11^th September ECB policy meeting produced no major surprises, with the governing council opting to maintain the key deposit rate at 2.0% for a second consecutive meeting. President Lagarde reiterated that monetary policy is currently well positioned, emphasising a wait-and-see, data-dependent approach. The ECB’s macroeconomic forecasts provided limited insight into future policy moves, as the assessment of the inflation outlook remained broadly unchanged. Notably, inflation projections for 2025 and 2026 were revised slightly upward by 0.1 percentage point to 2.1% and 1.7%, respectively, while the forecast for 2027 was trimmed to 1.9% from the previous 2.0%. Core inflation expectations were left unchanged for the next two years at 2.4% and 1.9%, but edged lower to 1.8% in 2027. Growth projections were adjusted as well, with 2025 GDP now expected to reach 1.2% (up from 0.9%), while the outlook for 2026 was cut to 1.0% (from 1.1%). The 2027 growth expectation was left unchanged at 1.3%.

Eurozone headline inflation in September rose above the ECB’s 2.0% target for the first time since April, registering 2.2% y/o/y, consistent with consensus and up from August’s 2.0%. Core inflation surprised slightly on the upside at 2.4%, above both consensus and the previous reading of 2.3%. Services prices also increased, reaching 3.2%. These figures reinforce the ECB’s decision to hold rates steady at the next policy meeting on 30^th October.

The European Commission's sentiment index improved to 95.5 in September, exceeding expectations and the previous month’s reading. Industrial confidence benefited from stronger production outlooks, though order books weakened. Services sentiment dipped, while consumer confidence edged higher to -14.9. Consumers indicated greater willingness to make large purchases, aligning with ECB hopes for a consumption-led recovery. However, employment expectations fell, reflecting softer hiring plans in services, retail, and construction, even as inflationary pressures continued to ease.

Spain received credit rating upgrades from Moody's and Fitch, with S&P having previously raised its rating, all citing robust economic growth and job creation. Moody’s upgraded Spain to A3 from Baa1, highlighting a more balanced economy, healthier banking sector, and a resilient labour market. Spain’s GDP is projected to expand by 2.7% in 2025, outpacing the eurozone average of 1.2%. Positive momentum is being driven by tourism, foreign investment, and immigration, while unemployment has reached its lowest level since 2008.

Germany’s business sentiment deteriorated unexpectedly in September, as the IFO business climate index declined to 87.7 from 88.9 in August, falling short of forecasts. The survey indicated declining satisfaction with current conditions and increased pessimism about the future, with all sectors except construction showing declines. The German economy contracted by 0.3% in Q2, attributed to slower US demand following tariff-induced stockpiling. Leading economic institutes marginally improved their 2025 growth forecast to 0.2%, with 2026 and 2027 projections unchanged at 1.3% and 1.4%, respectively.

Eurozone business activity accelerated in September, reaching the fastest pace in sixteen months. The HCOB Flash Composite PMI rose to 51.2 from 51.0 in August, beating analyst expectations. German services led the expansion, offsetting France’s continued contraction amid political and budgetary turmoil. While Germany saw joint-fastest activity growth since May 2023, France recorded its thirteenth consecutive monthly decline at the sharpest rate since April. Manufacturing across the bloc struggled, slipping below the 50.0 growth threshold to 49.5. Services activity remained strong at 51.4, a nine-month high. New orders stagnated, raising concerns about the sustainability of the recovery, and employment growth ceased, ending six months of job creation as manufacturers shed staff. Inflationary pressures moderated, with services cost inflation still elevated but easing slightly.

Finally, German industrial production for July posted its first monthly increase since March, rising 1.3% in line with consensus, compared to a revised 0.1% decline in June. The improvement was primarily driven by mechanical engineering, the automotive sector, and pharmaceuticals. This uptick offers some encouragement for a cyclical recovery in Germany’s industrial sector, although persistent weakness in factory orders may temper expectations.

UK. The BoE’s latest policy decision on 18^th September produced no significant surprises, as the MPC voted 7-2 to keep the key interest rate unchanged at 4%. This follows a narrower 5-4 vote in August, when the Bank opted for a 25 basis point rate cut. MPC members Dhingra and Taylor, who remain the most dovish voices on the committee, again advocated for further rate reductions. The accompanying policy guidance offered limited insight into future rate moves, reiterating that any additional easing will be gradual and cautious, and emphasising that policy adjustments are not predetermined.

In parallel, the BoE has moderated the pace of its balance sheet reduction, lowering the annual target to £70 billion from the previous £100 billion. This adjustment aligns with market expectations and reflects lower anticipated redemptions over the coming year. Consequently, active sales are projected to increase to £21 billion, up from £13 billion previously, with these sales continuing to be weighted away from longer-term maturities.

UK manufacturing activity remains subdued, with the S&P Global final manufacturing PMI registering 46.2 in September, unchanged from the flash estimate and down from 47.0 previously. This marks the twelfth consecutive month with the PMI below the expansion threshold of 50.0, indicating persistent contraction. Four of the five underlying components signalled further deterioration in operating conditions, with output declines spanning consumer, intermediate, and investment sectors.

Business sentiment in the UK has deteriorated, as evidenced by the Institute of Directors (IoD) business confidence index, which fell to a record low of -74 in September from -61 the previous month. Concerns over potential tax increases in the forthcoming November budget have weighed heavily on sentiment. Confidence in individual organisations also declined to -7, mirroring levels last seen in November 2024. Additionally, there was a reduction in headcount expectations, investment intentions, and revenue outlook, while wage expectations surged to +64 from +42, indicating persistent cost pressures.

Government borrowing exceeded forecasts in August, rising to £18 billion compared to the Office for Budget Responsibility (OBR) estimate of £12.5 billion—the highest August figure in five years. For the fiscal year to date, borrowing stands at £83.8 billion, surpassing the previous year by £16.2 billion and marking the second highest level for this period since 1993. These developments underscore the fiscal challenges facing Chancellor Reeves ahead of the November budget, with sentiment remaining negative due to elevated borrowing costs, economic underperformance, and government reversals on spending cuts.

Retail sales in the UK showed modest strength in August, increasing by 0.5% m/o/m, slightly above consensus expectations. Gains in non-store retailing and clothing stores offset declines in automotive fuel and technology equipment sales, with favourable weather cited as a contributing factor. Despite some positive retail figures over the summer, overall sector confidence remains fragile, undermined by concerns about taxation and inflation. The GfK consumer confidence index dropped by two points to -19 in September, with all sub-indicators reflecting weaker personal finances, diminished appetite for major purchases, and a less optimistic economic outlook. Rising costs for essentials have also led to reduced household savings, in line with the British Retail Consortium’s consumer confidence measure, which fell amid ongoing cost-of-living pressures.

Inflation in the UK remains elevated, holding at 3.8% y/o/y in August, consistent with consensus and previous readings. Core inflation came in at 3.6%, in line with expectations, while services inflation stood at 4.7%. The Office for National Statistics (ONS) noted that airfares exerted downward pressure on inflation, which was offset by increases in restaurant, hotel, and motor fuel prices. Food price inflation rose for the fifth consecutive month, in keeping with recent industry reports.

Recent indicators suggest that UK economic growth stalled at the start of Q3, with July GDP flat versus consensus and prior growth of 0.4%. Over the three months to July, GDP expanded by 0.2%, following 0.3% in June and 0.6% in May. Within this period, services and construction sectors posted modest gains, while production fell sharply by 0.9%. The ONS highlighted strength in transportation, health, computer programming, and office support services, though consumer-facing services failed to grow. Manufacturing remains broadly weak, reflecting subdued client confidence, weak export demand, and declining domestic activity. Nevertheless, the services sector has performed relatively well, maintaining expansionary momentum for four consecutive months through August.

Global market indices

USA:

S&P 500 +3.53% MTD and +13.72% YTD
Nasdaq 100 +5.40% MTD and +17.46% YTD
Dow Jones Industrial Average +1.87% MTD and +9.06% YTD
NYSE Composite +1.95% MTD and +12.92% YTD

The Equally Weighted version of the S&P 500 was +0.90% in September, 2.63 percentage points lower than the benchmark.

The S&P 500 Information Technology sector was the top performer in September at +7.21% MTD, while Materials underperformed at -2.31% MTD.

On Wednesday, the S&P 500 rose +0.34% to 6,711.20, while the Nasdaq Composite also increased, +0.42%, to 24,800.86. The Dow Jones Industrial Average advanced by 43 points, or +0.09%, closing at 46,411.10.

In corporate news, Intel is reportedly in preliminary discussions to bring AMD on board as a customer. 

Microsoft announced that Chief Commercial Officer Judson Althoff has been appointed CEO of its commercial business, with current CEO Satya Nadella shifting his focus toward technology and AI initiatives. 

Ford reported an 8.2% increase in Q3 sales, driven primarily by strong demand for trucks and electric vehicles.

General Motors also posted a 7.7% rise in its US auto sales for Q3, citing robust demand for electric vehicles and SUVs. 

Toyota’s North American division recorded a nearly 16% increase in auto sales, attributed to the continued strength in pickup trucks. 

Walmart announced plans to remove artificial dyes from its private-label food products in the US, reflecting the broader industry trend of ingredient reformulation.

Europe:

Stoxx 600 +1.46% MTD and +9.96% YTD
DAX -0.09% MTD and +19.95% YTD
CAC 40 +2.49% MTD and +6.98% YTD
FTSE 100 +1.78% MTD and +14.41% YTD
IBEX 35 +3.61% MTD and +33.46% YTD
FTSE MIB +1.25% MTD and +24.98% YTD

Source: FactSet

In Europe, the Equally Weighted version of the Stoxx 600 is +0.31% MTD, 1.15 percentage points less than the benchmark.

The Stoxx 600 Basic Resources is the leading sector, +9.23% MTD, while Food & Beverages exhibited the weakest performance at -4.76% MTD.

On Wednesday, within the STOXX Europe 600 sectors, the Health Care sector was the day's top performer, driven by a US pricing agreement between Pfizer and the US administration, as noted by Reuters on Wednesday. According to analysts, this deal alleviates a regulatory overhang for the sector and establishes a potential blueprint for European pharmaceutical companies to pursue similar arrangements. Within the sector, Novartis shares traded higher after the FDA approved its new oral treatment for a chronic inflammatory skin disease. Novo Nordisk is preparing to release late-stage trial results for its oral semaglutide treatment for Alzheimer's disease, and Ambu saw its shares rise following the announcement of new long-term targets.

Basic Resources also outperformed, reacting to reports that the EU intends to restrict steel imports. The proposal aims to address overcapacity by nearly halving foreign quotas and increasing tariffs. This positive sentiment prevailed despite a decline in iron ore prices, as traders monitored the fallout from a pricing dispute between major steelmakers and China's state-run iron ore buyer, which has halted new cargo purchases from BHP Group.

The Oil & Gas sector was another notable gainer, supported by positive corporate developments. TotalEnergies advanced on news of asset sales and a new renewables joint venture. Vår Energi’s shares rose after an asset acquisition, Eni traded higher on securing a new block in Côte d'Ivoire, and Vallourec was higher following a new order from Petrobras.

Conversely, the Technology sector was the most significant underperformer. Industrial Goods & Services also experienced steep declines, notwithstanding reports that EU leaders are expected to discuss the establishment of a ‘drone wall’ in response to recent airspace incursions by Russian jets and drones. The Construction & Materials sector also underperformed, with Selvaag Bolig declining on weak Q3 sales and Kaufman & Broad trading lower ahead of its earnings release. Other notable underperforming sectors included Travel & Leisure, Real Estate, and Telecom.

Global:

MSCI World Index +3.11% MTD and +13.33% YTD
Hang Seng +7.09% MTD and +33.88% YTD

Mega cap stocks had a mostly positive performance in September. Tesla +33.20%, Alphabet +14.18%, Apple +9.69%, Nvidia +7.12%, and Microsoft +2.22%, while Amazon -4.12%, and Meta Platforms -0.58%.

Energy stocks experienced a mixed performance so far in September, with the Energy sector -0.52% MTD. Energy Fuels +34.66%, Halliburton +8.23%, Baker Hughes Company +7.31%, Marathon Petroleum +7.25%, Apa Corp +4.57%, and Phillips 66 +1.83%, while Occidental Petroleum -0.76%, ExxonMobil -1.35%, Shell -2.85%, Chevron -3.31%, and ConocoPhillips -4.43%.

Materials and Mining stocks had a mixed performance in September. The Materials sector is -2.31% MTD. Sibanye Stillwater +47.84%, Newmont Mining +13.32%, and Mosaic +3.83%, while Yara International -0.30%, Albemarle -4.52%, Nucor Corporation -8.94%, Celanese Corporation -11.65%, and Freeport-McMoRan -11.67%.

Commodities

Gold reached yet another record high on Wednesday, extending its year-to-date gains to +47.01%. Gold’s rally has been driven, as noted by Reuters on Wednesday, by growing expectations of further monetary easing in the US, heightened safe-haven demand, and persistent weakness in the dollar. Earlier in the day, spot gold peaked at $3,895.09 per ounce before settling +0.13% higher at $3,865.45. Gold advanced +12.00% in September.

Geopolitical tensions, including ongoing conflicts in the Middle East and the war in Ukraine, have intensified market uncertainty, compounded by concerns regarding the Fed’s independence amid presidential influence. 

The rally in gold has been further supported by robust central bank purchases, increased inflows into gold backed ETFs, continued dollar depreciation, and strong demand for gold as a hedge against uncertainty.

According to the World Gold Council, global gold ETF demand has rebounded significantly this year, reaching 587.8 metric tons after experiencing a net outflow of 6.8 tons in 2024.

Oil prices declined for the third consecutive day on Wednesday, reaching a 16-week low, as market participants anticipated an increase in global supply due to a scheduled output boost by OPEC+ next month.

Brent crude futures dropped by $1.66, or -2.48%, settling at $65.40 per barrel—its lowest closing price since 5^th June. US WTI crude fell by 68 cents, or -1.09%, closing at $61.80, marking its lowest settlement since 30^th May.

US WTI was -2.39% in September and is -14.04% YTD and Brent was -1.56% in September and is -12.35% YTD.

The CEO of Diamondback Energy, a leading US oil producer, noted that domestic oil production growth is likely to stagnate if prices remain near $60 per barrel, as fewer drilling sites would be profitable at this price point, according to a Reuters report on Wednesday.

In related energy markets, US gasoline futures ended trading at their lowest level in nearly a year.

Traders widely expect OPEC+ to increase production in November by an amount similar to the 500,000 barrels per day (bpd) rise seen in September, despite a slowdown in demand from both the US and Asia. According to reports from Reuters and Bloomberg news, OPEC+ could agree to raise oil production by as much as 500,000 bpd in November—three times the increase approved for October—as Saudi Arabia aims to regain market share. However, OPEC clarified via its official X account that media reports regarding a planned 500,000 bpd output hike were misleading.

At a meeting on Wednesday, an OPEC+ panel emphasised the importance of adhering to existing production agreements and called for additional output cuts by members who previously exceeded their quotas. Furthermore, oil prices faced downward pressure following a larger-than-anticipated increase in US crude inventories last week.

EIA report. According to the latest EIA weekly report, US inventories of crude oil, gasoline, and distillates all increased last week amid reduced refining activity and softer demand. Specifically, crude oil inventories rose by 1.8 million barrels to reach 416.5 million barrels for the week ending 26^th September. However, stocks at the Cushing, Oklahoma delivery hub declined by 271,000 barrels during the same period.

Total product supplied—a key indicator of demand—decreased by 627,000 barrels per day, falling to 20.17 million barrels per day (bpd). Gasoline consumption also dropped, down 441,000 bpd to 8.52 million bpd.

US crude exports declined by 793,000 bpd to 4.48 million bpd, while net crude imports increased slightly by 71,000 bpd. Refinery crude runs were also lower, decreasing by 308,000 bpd, with refinery utilisation rates declining by 1.6 percentage points to 91.4%.

Gasoline inventories rose by 4.1 million barrels to a total of 220.7 million barrels. Distillate stockpiles, which include diesel and heating oil, increased by 578,000 barrels, bringing the total to 123.6 million barrels for the week.

Currencies

The US dollar index was -0.06% in September and is -9.94% YTD. The GBP was -0.44% against the dollar in September and is +7.73% YTD. The EUR was +0.44% in September against the USD and +13.35% YTD. 

The US dollar declined to its lowest level in two weeks against the Japanese yen on Wednesday, following data indicating that private-sector employment in the world’s largest economy contracted last month. Similarly, the dollar weakened to one-week lows against both the euro and the British pound in response to the disappointing employment figures.

According to the ADP National Employment Report released on Wednesday, US private employment decreased by 32,000 positions last month, following a downwardly revised loss of 3,000 jobs in August. This outcome sharply contrasted with economists’ expectations, who had anticipated an increase of 50,000 jobs after the previously reported gain of 54,000 in August.

With the Labor Department’s more comprehensive and closely monitored September employment report unavailable due to the government shutdown, investors placed increased significance on the ADP report, which is jointly produced with the Stanford Digital Economy Lab, to gauge the health of the labour market.

The duration of the government shutdown remains a critical factor for financial markets, especially as the Fed’s next policy meeting is scheduled for 29^th October, several weeks away.

The dollar index dropped to a one-week low, declining -0.06% to 97.74. Broader markets exhibited some characteristics of safe-haven trading, with low-yielding currencies such as the Japanese yen benefiting from increased demand. The greenback reached a one-week low against the euro, which rose +0.07% to $1.1727, while the British pound climbed to a one-week high against the dollar, up +0.22% at $1.3472.

In afternoon trading, the dollar fell -0.54% against the yen to ¥147.04, after previously reaching its lowest level since 17^th September. The US currency remained unchanged against the Swiss franc at CHF 0.7967.

BoJ officials have recently adopted a more hawkish stance, including former dovish board member Asahi Noguchi, who remarked on Monday that the need for policy tightening is now greater than ever.

Cryptocurrencies

Bitcoin +5.27% MTD and +25.42% YTD to $114,190.41
Ethereum -4.84% MTD and +29.25% YTD to $4,154.92

Bitcoin was +2.99% Wednesday and Ethereum was +3.96%. September was a challenging but positive month for cryptocurrencies. Bitcoin moved higher in early September driven by weakening US jobs data, which increased rate cut expectations. It peaked mid-month with Bitcoin hitting an all-time high above $115,000, before a sharp correction towards the end of September due to ETF outflows and liquidations totalling $3.45 billion. Ethereum continued to rise throughout most of September on DeFi growth and institutional investor interest before falling back in the last week of the month due to liquidations as investors started to worry about macro data and the Fed’s policy direction and pace. The total market cap fluctuated around $3.9–4 trillion, ending the month down roughly 2–3%. However, September saw some significant progress in relation to crypto ETFs with the US Securities and Exchange Commission (SEC) streamlining approvals for new ETF standards. It also saw the debuts of DOGE and XRP ETFs.

Looking ahead, October has historically been Bitcoin's strongest month, rising in 10 of the past 12 years, according to Compass Point Research. As noted by Coindesk.com, Bitcoin has been up 14.4% on average in October since 2013. With the US government shutdown causing uncertainty in financial markets, it appears that cryptocurrencies are still in correlation with traditional risk assets and will likely continue to act as digital gold, rising in times of market stress. 

Note: As of 5:30 pm EDT 1 October 2025

Fixed Income

US 10-year yield -8.1 bps MTD and +47.4 bps YTD to 4.102%
German 10-year yield -1.1 bps MTD and +34.9 bps YTD to 2.718%
UK 10-year yield -2.4 bps MTD and +12.7 bps YTD to 4.695%

On Wednesday, yields on US Treasuries declined across the curve as private employment data indicated a weakening labour market, while the ongoing government shutdown persisted. Although government shutdowns can introduce market volatility, historical evidence suggests there is no consistent correlation with overall market performance.

Fitch Ratings reported that the current shutdown does not have immediate implications for the rating of US government debt. Nevertheless, the agency underscored persistent weaknesses in policymaking and ongoing political brinkmanship surrounding budgetary matters.

According to data released by the Institute for Supply Management (ISM) on Wednesday, US manufacturing showed signs of gradual recovery in September. However, new orders and employment remained subdued, as factories continued to contend with the adverse effects of tariffs on imported goods.

The yield on the 10-year Treasury note fell by -5.0 bps to 4.102%, while the two-year yield dropped -8.0 bps to 3.537%, marking the two-year note’s largest daily gain since early September. The yield on the 30-year Treasury decreased by -2.1 bps to 4.709%.

The spread between two-year and 10-year Treasury yields widened by 3.0 bps to 56.5 bps. Over the course of September, this spread contracted by 7.3 bps, declining from 60.8 bps to 53.5 bps.

On the supply front, a spokesperson from the Treasury Department confirmed that auctions for three-year, 10-year, and 30-year securities will proceed as scheduled next week.

The yield on the US 10-year Treasury note was -8.1 bps in September. The US 30-year yield was -19.9 bps. At the short end, the two-year Treasury yield was -0.8 bps in September.

The current sentiment in the Fed funds futures market, according to CME's FedWatch Tool, suggests a 99.4% probability of an additional reduction to the Fed funds rate at the October FOMC meeting. Markets are pricing in an implied target rate 72.3 bps lower by year-end, compared to 68.2 bps the week prior, and 56.4 bps a month ago.

In the euro area, government bond yields declined on Wednesday, following the trajectory of US Treasuries as newly released inflation data strengthened expectations that the ECB will maintain its current interest rates for an extended period. 

Figures released over the last week showed that inflation in the euro area accelerated last month. Nevertheless, Tuesday's economic data from the single currency bloc did not produce significant movements in the sovereign bond markets.

Germany's 10-year Bund yield decreased by -0.2 bps to 2.718%. The two-year Schatz, which is closely linked to ECB monetary policy expectations, finished the session -1.2 bps lower at 2.021%. On the longer end of the maturity spectrum, the 30-year Bund yield rose by +1.5 bps to 3.299%.

Market participants largely anticipate that the ECB will refrain from cutting rates until at least July 2026, with the probability of a 25 bps reduction at that time estimated at around 30%.

Italy's 10-year government bond yield declined by -1.6 bps to 3.529%, narrowing the spread over its German equivalent to 81.1 bps. Over the course of September, this spread contracted by 3.1 bps, moving from 86.0 basis points to 82.9 bps. The Italian 10 year bond yield was -4.2 bps in September to 3.545%.

The yield spread between German Bunds and 10-year French OATs stood at 82.1 bps, near its highest level in seven months. This follows recent comments by French Prime Minister Sebastien Lecornu, who stated his intention to target a budget deficit of approximately 4.7% of GDP by 2026. The French 10-year yield edged slightly lower on Wednesday, declining by -0.2 bps to 3.539%.

The German 10-year yield was -1.1 bps in September. The spread between US 10-year Treasuries and German Bunds stood at 143.6 bps at the end of September, reflecting a 7.0 bps contraction over the month. It was 138.4 bps on Wednesday.

The 2-year Schatz was +8.2 bps to 2.033% in September, and on the long end, the German 30-year yield was -5.3 bps to 3.284%.

France’s 10-year OAT yield was +2.7 bps to 3.541% in September. The spread of French government bonds versus German Bunds widened by 3.8 bps over the month to 82.5 bps. It was 82.1 bps on Wednesday.

In the UK, the 10 year gilt yield was -2.4 bps in September and it was -0.5 bps on Wednesday to 4.695%. However, the UK 30 year was -10.2 bps in September and it was +1.0 bps to 5.513% on Wednesday.

Note: Data as of 5:00 pm EDT 1 October 2025

What to think about in October 2025

Q3 market themes: hyperscaler spending, consumer bifurcation, and FX tailwinds. Key themes expected to emerge during the Q3 earnings season include AI, consumer resilience and bifurcation, tariffs and related mitigation measures, as well as the impact of a weaker US dollar. The level of capital expenditure by hyperscalers remains central to the AI narrative, while issues surrounding monetisation, productivity, and return on investment are likely to receive heightened scrutiny. 

As banks kick off Q3 earnings season, attention is expected to centre on the stability of consumer resilience, the ongoing recovery in capital markets activity, and the sector’s perspective on net interest income (NII) following the September FOMC meeting.

Consumer bifurcation will likely attract increased focus later in the earnings season, particularly as retailers report, amid growing concerns about challenges facing lower-income segments. Tariffs remain a dynamic area, with uncertainty from their delayed effects and legal ambiguities. Companies’ mitigation strategies, which have been positively received in Q2, are anticipated to come under additional scrutiny as tariff uncertainty has been cited as a factor contributing to labour market stagnation.

Foreign exchange, especially the weaker dollar, is anticipated to be a prominent theme. Analysts at Jefferies have highlighted that a declining DXY index y/o/y could provide a tailwind for Q3 earnings, noting that the average delta between expected and actual S&P 500 sales growth is 225 bps when the greenback is weaker, compared to 120 bps when it strengthens. Fiscal policy will likewise garner additional attention, particularly regarding cash tax savings from depreciation and expensing provisions in the One Big Beautiful Bill Act.

In the fixed income market, longer-dated US Treasuries performed strongly heading into October. The September rally in longer-term rates, which pushed the 30-year yield down 19.9 bps to approximately 4.730% and the 10-year yield fall by 8.1 bps to 4.152%, has been attributed to factors such as increased tariff revenue alleviating debt and deficit pressures, less tariff-driven inflation than anticipated, robust foreign demand for US debt, and a retreat in global yields from recent highs, including those in Japan and the UK.

Additionally, analysts project the issuance of $115 billion in investment-grade supply for October, the highest for the month since 2021.

However, several risks to the current rate environment persist, including potential legal rulings that could impact tariff revenue, a rise in shorter-term inflationary pressures, and the prevailing condition of very low rate volatility.

Key events in October 2025

The potential policy and geopolitical risks for investors that could affect corporate earnings, stock market performance, currency valuations, sovereign and corporate bond markets and cryptocurrencies include:

3-4 October Legislative elections, Czechia. A government led by former Prime Minister Andrej Babis, known as the “Czech Trump” – and his Action of Dissatisfied Citizens party (ANO) is the most likely outcome though ANO will likely need coalition partners, potentially including the far-right, populist alliance led by Freedom and Direct Democracy (SPD)’s Tomio Okamura. A win by Babis will likely make things harder for the EU’s pro-Ukraine stance.

13-18 October World Bank and International Monetary Fund (IMF) Autumn Meeting. Participants will look forward to the Plenary session, the Development Committee and the International Monetary and Financial Committee meetings. Other featured events include regional briefings, press conferences, and fora focused on international development, the global economy, and financial markets.

26-28 October ASEAN 47th Summit, Kuala Lumpur, Malaysia. Under the theme "Inclusivity and Sustainability," Malaysia's ASEAN Chairmanship will focus on strengthening regional cooperation in economic development, security, digital transformation, and environmental sustainability. 

26 October Legislative elections, Argentina. President Javier Milei’s right-leaning La Libertad Avanza (LLA) party will likely benefit from the US intervention that spurred a massive rally in stocks and bonds and provided support to the peso after the central bank burnt through more than $1 bn in its attempts to shore up peso. However, stagnating wages and rising unemployment have disillusioned some voters, and the president’s approval ratings dropped from 48% in July to 4% in the middle of September, according to pollster Trespuntozero.

28-31 October APEC 2025 Summit, South Korea. The theme at this meeting is “Building a Sustainable Tomorrow: Connect, Innovate, Prosper”. APEC members are expected to discuss ways to strengthen the multilateral trading system with WTO at its core and economic competitiveness of the Asia-Pacific region through innovation and digitalisation. Other topics will include global challenges such as energy issues, climate change, health, food security, and demographic change.

28-29 October Federal Reserve Monetary Policy Meeting. Market's focus will be less on the interest rate decision itself—with a 25 bps reduction widely expected—and more on the forward-looking guidance and the characterisation of economic risks. The central tension for the Fed is managing a delicate balancing act: while inflation has shown signs of moderation, it remains above the 2% target, yet leading economic indicators are increasingly pointing to heightened economic uncertainty and a cooling labour market. The most critical element, however, will be Chair Powell's press conference. Analysts will parse the FOMC statement for clues on how the committee views the current policy rate's restrictiveness and the potential of further calibration of balance of risks.

29 October Parliamentary elections, The Netherlands. Early elections are being held following the collapse of the coalition government. Prime Minister Dick Schoof (independent) on 3 June submitted his cabinet’s resignation after the far-right Party for Freedom (PVV) announced its withdrawal from the coalition. Geert Wilders’ PVV has been ahead in the polls while the liberal People’s Party for Freedom and Democracy (VVD) party is expected to lose seats. The centre-left joint list of the Greens, the GroenLinks-PvdA, and the alliance of centre-left Labour Party (PvdA) is likely to come in second.

29-30 October European Central Bank Monetary Policy Meeting. The ECB is expected to hold rates at this meeting as inflation has come in at target levels. ECB President Christine Lagarde has said that the eurozone economy is handling US tariffs better than earlier expected, leaving inflation risks "quite contained." Following the September meeting she had said that the ECB is not on a predetermined path, and “we will take stock meeting by meeting ... in order to make sure that we stay in a good place."

29-30 October Bank of Japan Monetary Policy Meeting. After keeping rates on hold at 0.5% in September, there are increasing expectations that pressure from more hawkish voting members will put pressure on governor Kazuo Ueda to move faster on interest rate hikes, which will result in a hike at this meeting. The anticipated economic headwinds following on from the US administration’s tariffs might not be as strong as initially suggested as confidence among big Japanese manufacturers improved for the second straight quarter and firms maintained their upbeat spending plans.

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