Asset Management: Monthly Macro Insights - September 2025

Investors are hoping for accommodative monetary policy in a stable economic environment, with “insurance” or “normalization” rate cuts. However, the Goldilocks scenario is increasingly being tested as adverse inflation dynamics clash with a weakening labour market.

Front loading hangover?

Global industrial activity surged in the first few months of 2025 and was accompanied by an even larger surge in exports. However, despite some strength in global capex – particularly resilient US tech import demand – a downshift is now under way.

Looking ahead, the August S&P global manufacturing PMI rose to 50.9 from 49.7 in July, signalling a slight improvement in operating conditions and suggesting the soft patch could be short lived. That said, the index has been volatile in recent months, and the details were much less positive than the headline.

China’s outlook is highly uncertain…

Even as its exports to the US have collapsed, China has benefited from the global capex pickup through transshipments and sales to other markets, helping the economy remain remarkably resilient in the first part of 2025. However, a key risk is further tightening of controls by other countries as the US increases scrutiny of the rerouting of Chinese shipments.

Despite better weather conditions and the 90 day pause on higher US tariffs – into early November – China’s August PMIs show the economy has not shaken off July’s weakness. Although the soft data argue for more monetary easing, the PBOC might be cautious about adding liquidity given the surge in equities, which seems to be outpacing the real economy.

…and so is the US

The Fed is increasingly caught in a dilemma between its two mandates: price stability and full employment. On the latter, recent data are consistent with weakening labour demand, paving the way for the Fed to ease at the September meeting.

However, progress towards bringing inflation back to levels consistent with the price stability mandate has stalled.

The key question is whether the deterioration in growth and the labour market will prove more consequential than the pickup in prices. Inflation dynamics will interact uncomfortably with policy deliberations for most Fed officials, except perhaps those inclined towards the Trump Administration’s calls for lower rates to ease the financing of large fiscal deficits. Ironically, recent attacks on the Fed’s independence are likely to push long term yields higher than otherwise, as bond investors impose greater discipline.