Executive Summary
The Fed cut interest rates as expected by 0.25% to 4.25%. The market response was bullish for riskier assets but did not do much for bonds. The bond market was pricing in 3 cuts before year-end, prior to the meeting, and three after, then into next year, the bond market is pricing in two more cuts.
The bond market did not rally following the meeting, but instead the 10 yr. yield and the 2 yr. yield bounced off prior lows reached over the last several years. The backup in longer-dated U.S. Treasury yields is counterintuitive against the backdrop of sliding short-term rates. But investors in longer maturity debt weigh expectations not only for future short-term rates but also the likely course of economic growth, inflation, Fed independence, and government finances, including how much the debt the U.S. has to sell to finance current spending and roll over existing debt.
Last week, municipals significantly outperformed taxable fixed income on the back of tax-exempt yields rallying. Specifically, benchmark AAA municipal rates fell 7 to 20bps across the curve, with the largest moves further out the curve. Meanwhile, Treasury yields rose 1 to 5bps within seven years and fell 3 to 10bps in longer-dated maturities.
In addition, the U.S. dollar did not fall during the week for the first time in what feels like a long time. The U.S. dollar is still down 10% year-to-date, but before the Fed meeting it had broken to down to lows of the year at -11%. The Euro continues to hold at +13% year-to-date vs. the USD. While equities liked the prospect of rate cuts with segments like small-caps rallying, not all markets agreed that the Fed was dovish. We believe bonds and the currency markets are indicating that the Fed’s messaging was somewhat hawkish. We continue to watch the 2 yr. Treasury yield as a tell for easier Fed policy to come. For now, the 2 yr. yield is signaling a bit more easing.
Mainland Chinese stock markets declined after a few macro metrics pointed to an economic slowdown. August retail sales and industrial output marked the worst monthly performance for both gauges this year. Fixed asset investment growth slowed in the year’s first eight months, the lowest reading for the period on record except for 2020, a pandemic year.
All three readings trailed expectations and pointed to a broad slowdown in China’s economy after it grew a surprisingly strong 5.3% in the year’s first half. The weak data supported the view that Beijing will likely roll out additional stimulus measures to hit its official 5% growth target as deflation continues to stalk the economy. Consumer prices turned negative for the first time in three months.
Unlike the U.S., China has been battling deflation in recent years. But weak domestic demand amid an ongoing housing slump has made it difficult for the government to engineer a long-term rebound in prices. New and existing home prices fell in August month on month in 70 cities, according to the China statistics bureau, while new home sales in Beijing declined almost 20% in August from a year ago, according to the China Real Estate Information Corp. The latest data raised speculation that officials may implement targeted stimulus measures to help bolster the housing market, which has persisted for more than four years with little evidence of a potential turnaround.
Equities
The S&P 500 returned +1.2% and ended the week at an all-time high. The Fed delivered the rate cut that the market was anticipating; expectations for further rate cuts have bolstered the market’s confidence that the economy can re-accelerate, which bodes well for corporate earnings. Small cap stocks also notched an all-time high during the week, with the Russell 2000 rising 2.2%, ahead of large cap stocks. Communication Services (+3.4%) and information technology (+2.1%) led the S&P 500; consumer staples (-1.2%) and real estate (-1.1%) were the laggards. EAFE markets returned -0.2% dragged lower by the U.K. (-0.9%) and Japan (-0.5%), while EM markets returned +1.2% with Brazil (+3.1%) and Korea (+2.0%) leading.
From a valuation perspective, the S&P 500, the NASDAQ, and EM trade at or above +1 standard deviation based on historical forward P/E ratios with the S&P 500 at +2.1, the NASDAQ at +1.3 and EM at +1.6. For the next 12 months, EPS growth for S&P 500 is expected to be 8.6% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 13.7% (vs. 10.7% annualized over the last 20 years). Equities across markets caps in the U.S., and in non-U.S. developed and emerging markets, trade at or above their 20-year averages based on forward P/E ratios.
Fixed Income
Investment grade fixed income sectors had mixed returns as rates rose across the curve. Municipals returned +0.3%, US AGG returned -0.2% and US IG returned -0.1%. HY bonds returned +0.3% while bank loans returned +0.1%. EM debt returned -1.0% even as the U.S. dollar rose 0.1% due to spreads widening 26bps.
Rates
Rates rose across the curve as traders worried about stubborn inflation with the Fed signaling further cuts. The recession-watch 3M-10Y spread widened 12bps to +15. The 2Y-10Y spread widened 5bps to +55. Rates rose in other developed markets. The BTP-Bund spread is at 0.79%. 5-year breakeven inflation expectations rose 1bps to 2.47% (vs. low of 1.88% on Sept 10); 10-year breakeven inflation expectations rose 2bps to 2.39% (vs. recent low of 2.03% on Sept 10); the 10Y real yield rose 4bps to 1.74%. The market now expects two further cuts in 2025 vs the Fed’s guidance of two cuts. At year-end 2025, the market expects the Fed Funds rate to be 3.63% vs. the Fed’s guidance of 3.5%-3.75%.
Currencies/Commodities
The dollar index rose 0.1%. The commodities complex fell 0.4% as energy prices fell 0.2% for the week. Brent prices fell 0.5% to $67/bbl. U.S. natural gas prices fell 1.8% while European gas fell 0.9%.
Market monitors
Volatility was flat for equities and bonds (VIX = 15, MOVE = 73); the 10-year average for each is VIX=19, MOVE = 80. Market sentiment (at midweek) rose from -22 to -1 as investors cheered the rate cut but remained cautious.
Weekly Commentary
Investment Commentary – September 22, 2025
Stuart Katz
Executive Summary
The Fed cut interest rates as expected by 0.25% to 4.25%. The market response was bullish for riskier assets but did not do much for bonds. The bond market was pricing in 3 cuts before year-end, prior to the meeting, and three after, then into next year, the bond market is pricing in two more cuts.
The bond market did not rally following the meeting, but instead the 10 yr. yield and the 2 yr. yield bounced off prior lows reached over the last several years. The backup in longer-dated U.S. Treasury yields is counterintuitive against the backdrop of sliding short-term rates. But investors in longer maturity debt weigh expectations not only for future short-term rates but also the likely course of economic growth, inflation, Fed independence, and government finances, including how much the debt the U.S. has to sell to finance current spending and roll over existing debt.
Last week, municipals significantly outperformed taxable fixed income on the back of tax-exempt yields rallying. Specifically, benchmark AAA municipal rates fell 7 to 20bps across the curve, with the largest moves further out the curve. Meanwhile, Treasury yields rose 1 to 5bps within seven years and fell 3 to 10bps in longer-dated maturities.
In addition, the U.S. dollar did not fall during the week for the first time in what feels like a long time. The U.S. dollar is still down 10% year-to-date, but before the Fed meeting it had broken to down to lows of the year at -11%. The Euro continues to hold at +13% year-to-date vs. the USD. While equities liked the prospect of rate cuts with segments like small-caps rallying, not all markets agreed that the Fed was dovish. We believe bonds and the currency markets are indicating that the Fed’s messaging was somewhat hawkish. We continue to watch the 2 yr. Treasury yield as a tell for easier Fed policy to come. For now, the 2 yr. yield is signaling a bit more easing.
Mainland Chinese stock markets declined after a few macro metrics pointed to an economic slowdown. August retail sales and industrial output marked the worst monthly performance for both gauges this year. Fixed asset investment growth slowed in the year’s first eight months, the lowest reading for the period on record except for 2020, a pandemic year.
All three readings trailed expectations and pointed to a broad slowdown in China’s economy after it grew a surprisingly strong 5.3% in the year’s first half. The weak data supported the view that Beijing will likely roll out additional stimulus measures to hit its official 5% growth target as deflation continues to stalk the economy. Consumer prices turned negative for the first time in three months.
Unlike the U.S., China has been battling deflation in recent years. But weak domestic demand amid an ongoing housing slump has made it difficult for the government to engineer a long-term rebound in prices. New and existing home prices fell in August month on month in 70 cities, according to the China statistics bureau, while new home sales in Beijing declined almost 20% in August from a year ago, according to the China Real Estate Information Corp. The latest data raised speculation that officials may implement targeted stimulus measures to help bolster the housing market, which has persisted for more than four years with little evidence of a potential turnaround.
Equities
The S&P 500 returned +1.2% and ended the week at an all-time high. The Fed delivered the rate cut that the market was anticipating; expectations for further rate cuts have bolstered the market’s confidence that the economy can re-accelerate, which bodes well for corporate earnings. Small cap stocks also notched an all-time high during the week, with the Russell 2000 rising 2.2%, ahead of large cap stocks. Communication Services (+3.4%) and information technology (+2.1%) led the S&P 500; consumer staples (-1.2%) and real estate (-1.1%) were the laggards. EAFE markets returned -0.2% dragged lower by the U.K. (-0.9%) and Japan (-0.5%), while EM markets returned +1.2% with Brazil (+3.1%) and Korea (+2.0%) leading.
From a valuation perspective, the S&P 500, the NASDAQ, and EM trade at or above +1 standard deviation based on historical forward P/E ratios with the S&P 500 at +2.1, the NASDAQ at +1.3 and EM at +1.6. For the next 12 months, EPS growth for S&P 500 is expected to be 8.6% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 13.7% (vs. 10.7% annualized over the last 20 years). Equities across markets caps in the U.S., and in non-U.S. developed and emerging markets, trade at or above their 20-year averages based on forward P/E ratios.
Fixed Income
Investment grade fixed income sectors had mixed returns as rates rose across the curve. Municipals returned +0.3%, US AGG returned -0.2% and US IG returned -0.1%. HY bonds returned +0.3% while bank loans returned +0.1%. EM debt returned -1.0% even as the U.S. dollar rose 0.1% due to spreads widening 26bps.
Rates
Rates rose across the curve as traders worried about stubborn inflation with the Fed signaling further cuts. The recession-watch 3M-10Y spread widened 12bps to +15. The 2Y-10Y spread widened 5bps to +55. Rates rose in other developed markets. The BTP-Bund spread is at 0.79%. 5-year breakeven inflation expectations rose 1bps to 2.47% (vs. low of 1.88% on Sept 10); 10-year breakeven inflation expectations rose 2bps to 2.39% (vs. recent low of 2.03% on Sept 10); the 10Y real yield rose 4bps to 1.74%. The market now expects two further cuts in 2025 vs the Fed’s guidance of two cuts. At year-end 2025, the market expects the Fed Funds rate to be 3.63% vs. the Fed’s guidance of 3.5%-3.75%.
Currencies/Commodities
The dollar index rose 0.1%. The commodities complex fell 0.4% as energy prices fell 0.2% for the week. Brent prices fell 0.5% to $67/bbl. U.S. natural gas prices fell 1.8% while European gas fell 0.9%.
Market monitors
Volatility was flat for equities and bonds (VIX = 15, MOVE = 73); the 10-year average for each is VIX=19, MOVE = 80. Market sentiment (at midweek) rose from -22 to -1 as investors cheered the rate cut but remained cautious.
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