Market Developments
The week opened with the reflation trade still working in equities’ favour, carried by falling crude, and closed with the bond market taking it back. Wednesday’s flash PMI surveys came in far stronger than expected, with the composite output index jumping to 58.4 from 56.0 in August and input costs at their highest since October 2022, and the market read the print as an inflation signal rather than a growth one. Treasury yields rose across the curve in response, with the 10-year touching its highest level since 2007 and the 30-year its highest in more than twenty years, and small caps took the sharpest hit as the move extended. Equities pared back their early gains through midweek before stabilizing into Friday, with the S&P 500 finishing the week up 1.2% and the Nasdaq up 3.3%. Jobless claims of 197,000 came in below consensus, giving the hawks little to argue with and keeping futures priced for another Fed hike, most likely in October.
Asia carried its own policy story. The Bank of Japan raised its policy rate 25 basis points on September 18, a move markets read as less hawkish than expected given two dissenting votes, though Governor Ueda kept the door open to further tightening by emphasizing upside inflation risks. Elsewhere, oil did most of the work in both directions: Brent fell toward $99 early in the week on hopes of a phased Strait of Hormuz reopening, then reversed after indirect US-Iran talks produced nothing and fresh Houthi strikes on Saudi targets were intercepted. The round trip pulled gold back below $4,300 an ounce on higher real yields, while the dollar stayed firm against the euro and sterling. Indian equities extended their negative streak, with mid-caps bearing the brunt of the selloff, and the week’s clearest positive was political: Xi Jinping’s Washington visit produced a two-month extension of the US-China trade truce to January 10, 2027.
