Market Matters: US Inflation up, Job’s down – Equities up – Go figure!

Market Overview

It was one of those weeks where the numbers and the markets seemed to be reading from entirely different scripts. The data darkened as weekly jobless claims rose again, payroll revisions painted a softer picture of hiring, inflation ticked higher, and consumer confidence slipped. A combination that might normally unsettle investors – slower growth colliding with stickier prices, the sort of stagflation-lite mix that leaves policymakers with little room to manoeuvre.

Yet US equities marched serenely to a succession of all-time highs, as if none of it mattered. The dissonance is really striking. Investors appear to be leaning on liquidity, earnings resilience, and the ever-potent AI productivity narrative, while quietly hoping the macro wobbles prove temporary. It may be optimism, it may be denial, or just the market doing what it so often does best: ignoring reality until it can’t.

It’s worth remembering that the equity story this year hasn’t just been about Wall Street. While the S&P 500 has hit fresh highs and now edges ahead of Europe year-to-date in local currency terms, it is still lagging the performance of many peers. China, despite all the scepticism, has been the standout with gains of over 35% helped by a revival in tech leadership, a home-grown AI narrative, and valuations that investors increasingly view as compelling. Broader Asia ex-Japan and emerging markets have also surged, with Japan itself quietly clocking double-digit returns. Even the FTSE 100 has outpaced the US, benefiting from global rotation and a valuation discount that has proved too attractive to ignore.

The drivers vary, policy shifts, tariff exemptions, selective stimulus, and in China’s case, domestic innovation stories that echo the US AI boom. But the common thread is diversification as investors are no longer looking at the US in isolation. With stretched valuations stateside and persistent macro uncertainty, flows have found their way into regions offering either stronger value or more cyclical leverage. The result is a genuinely global rally, not just another chapter in US exceptionalism.

United States – Cracks Beneath the Surface

The latest run of US data underscored a simple truth that the labour market is slowing, inflation is proving stubborn, and households are starting to notice.

Jobs: Employers added just 22,000 jobs in August, extending the sharp deceleration seen through the summer. Weekly claims have climbed to 263,000, the highest in almost four years, with the four-week moving average now trending higher. Much of the latest spike was concentrated in Texas, but the broader picture is one of softer hiring, increased layoff activity, and downward revisions that paint a weaker baseline than previously thought. Real wage growth, meanwhile, has slipped to its weakest in over a year at +0.7% y/y, reducing households’ purchasing power.

Inflation: Core CPI rose 0.3% in August, in line with forecasts, but the headline index jumped 0.4%, the sharpest since January. Shelter costs have picked up again, airfares and hotels have spiked, and tariffs appear to be creeping into goods prices, from cars to appliances. Inflation is no longer just a story of services stickiness; goods are back in the frame. The Fed is still expected to cut rates next week, but the persistence of inflation makes the trajectory beyond September more complicated. Make no mistake,  this inflation story isn’t over.

Confidence: Consumers are beginning to connect the dots. The University of Michigan’s sentiment index fell to 55.4 in September, the lowest since May and well below expectations. Both current conditions and expectations weakened, while long-term inflation expectations rose for a second straight month to 3.9%. The survey highlighted rising fears of personal job loss and squeezed finances. Tariffs loomed large too, with nearly 60% of respondents mentioning them unprompted.

The combination leaves policymakers in a bind as weaker job growth argues for easing, but firmer inflation muddies the case for a clear-cutting cycle. Markets, for now, are pricing in not just a September cut but two further moves this year. Whether the Fed obliges will depend on how long this stagflation-lite backdrop persists and how patient investors remain in ignoring it.

Europe – A Plateau at the ECB, Politics in Play

The ECB left rates unchanged for a second straight meeting, holding the deposit rate at 2% and signalling satisfaction that inflation is back under control. President Lagarde declared that ‘inflation is where we want it to be,’ though she conceded the outlook remains clouded by trade frictions and geopolitics. Markets read the decision as confirmation that the cutting cycle is over, as euro bond yields moved higher, the currency strengthened, and bets on further easing were pared back.

Updated forecasts reinforced the sense of a central bank in no rush to move again. Inflation is projected at 1.7% next year and 1.9% in 2027, essentially on target, while GDP is projected to remain muddling along at around 1%. That puts the ECB in what Lagarde called a ‘good place’ with policy neither restrictive nor supportive, and firmly data-dependent. Yet Governing Council members remain split. France’s Villeroy has kept the door open to another reduction, citing downside risks, while Bundesbank chief Nagel insists current levels are appropriate and continuity is key. The official line is ‘meeting by meeting’, but the market’s verdict is clearer that Europe has reached its plateau.

If policy is stable, politics is less so. France’s government collapsed last week after the failure of unpopular budget reforms, sending 10-year OAT yields spiking above Greek equivalents and reviving questions over fiscal credibility in the euro area’s second-largest economy. The arrival of yet another prime minister, the fifth in two years, underlines how fragile Paris looks just as markets demand fiscal discipline. With Trump’s tariff regime also fixing 15% levies on most EU exports, sentiment remains volatile even as confidence surveys point to a manufacturing recovery.

European equities took it in stride, with the STOXX 600 nudging higher, helped by defence names and industrials, but the backdrop is more complex than the headline would suggest. Growth remains fragile, risks are finely balanced, and the political calendar is adding fresh layers of uncertainty. Investors may take comfort from an ECB that has stopped cutting, but the cracks in Europe’s fiscal and political fabric are unlikely to be so easily patched over.

United Kingdom – Stagnant Growth, Markets Defy the Mood

The latest GDP numbers confirmed that Britain entered the third quarter with little positive momentum. Output was flat in July, reversing the modest 0.4% expansion recorded in June. Services managed only a 0.1% gain, and construction grew by 0.2%, but those advances were offset by a near 1% slump in industrial production and a 1.3% fall in manufacturing, the sharpest in a year. Electronics, pharmaceuticals and machinery all dragged on the headline. Over the three months to July, growth was just 0.2% evidence that the economy is losing altitude after a stronger first half. For a government that staked its credibility on delivering the fastest G7 growth, the timing is awkward. Reeves heads into November’s budget with a widening fiscal hole, higher debt-servicing costs, and the prospect of further tax rises that risk snuffing out what momentum remains.

Ordinarily, such anaemic data would weigh on domestic markets. Yet UK equities have been among the quiet success stories of 2025. Despite the hand-wringing about the collapse of London’s IPO pipeline and Klarna’s decision to choose New York over the City, the FTSE 100 has outpaced both the S&P 500 and the Nasdaq on a year-to-date basis in GBP. Overseas investors, including US institutions, are buying into the valuation discount, the dividend support and the takeover activity that has made UK assets too cheap to ignore. At home, retail investors remain reluctant, still funnelling money into global funds and Wall Street exposure, but the weight of international capital has started to shift sentiment.

Fixed income tells a slightly different story. Ten-year gilt yields, which peaked at around 4.8% at the start of September, have since eased back as markets temper expectations of further fiscal expansion and begin to price in the possibility of softer growth into year-end. The move lower in yields provides some relief for Reeves ahead of her budget, but it also underscores how sensitive the UK remains to shifts in confidence over fiscal discipline. Sterling, meanwhile, has been stable, reflecting a market consensus that the Bank of England will hold rates steady this month before reassessing in the fourth quarter.

The result is another striking divergence: a macro narrative dominated by stagnation and fiscal strain, alongside an equity market that is quietly delivering mean reversion and a bond market that has regained some poise. If the FTSE rally can broaden beyond the blue-chips to mid-caps and small-caps, and if gilt yields continue to drift lower, the market itself may start to repair the UK’s battered reputation as a place to invest. For now, it remains a curious paradox, a sluggish economy coupled with an equity market that everyone claims to hate, but which is quietly doing its job.

China & Asia – Hot Markets, Fragile Credit

Asia remains the standout this year, with China in particular running hot. August’s macro prints offered little encouragement; consumer prices fell 0.4%, producer prices dropped nearly 3%, and autos recorded their weakest growth in 18 months. Credit data also pointed to stress, new loans came in well below expectations, aggregate financing slowed, and both household mortgages and corporate long-term borrowing remain anaemic. The drag from property, weak private demand for credit, and sluggish nominal growth all reinforce the view that fiscal support rather than monetary tweaks will be needed to drive a durable recovery.

And yet the equity market continues to defy the gloom. Alibaba was the week’s standout after unveiling upgraded large-language models that promise greater efficiency at lower cost. Mainland investors bought heavily through Southbound Stock Connect, while foreign ETFs recorded inflows, underlining that both local and global capital are finding reasons to re-engage. Record margin financing shows domestic leverage is back, and the government’s quiet support for innovation and tech self-sufficiency is helping frame AI as the rally’s organising narrative.

Alibaba HK Stock Price and Net Inflow From Mainland Investors (source Kraneshares)

Beyond China, the momentum is broad. Japan keeps setting records, helped by corporate reform and a still-cautious Bank of Japan. Korea and Taiwan remain key beneficiaries of the AI supply chain, drawing steady foreign inflows. At the same time, India extends its rally on reform optimism and its appeal as a cheaper source of growth. Together, these markets show that Asia is capturing flows not just from retail investors at home but also from institutions abroad. The paradox should be familiar; economic cracks remain deep, but liquidity, valuations, and a powerful tech story are enough to keep markets running hot.

This week… all eyes on the Fed

The coming week will be dominated by the Federal Reserve’s September meeting. After a run of weaker labour data and softer sentiment surveys, markets are convinced the Fed will cut rates for the first time this year. Futures are pricing in not just a 25bp move on Wednesday but the likelihood of at least two more cuts before year-end. The complication is inflation as August CPI came in hotter than expected, with both headline and core firming, while services prices remain sticky. That puts Powell in the awkward position of having to justify easing policy even as inflation sits above target.

Investors will be watching not just the decision but the tone of the press conference and the new dot plot. A clear signal that this is the start of a cutting cycle would extend the rally, but hints of caution or dissent could quickly sour sentiment. Expect markets to react as much to Powell’s words as to the rate decision itself.

Beyond the Fed, the calendar is busy. In the US, we get retail sales, industrial production and housing data, all of which will shape the narrative on whether the slowdown is mild or something deeper. In Europe, focus will be on how French politics and bond markets settle after last week’s turmoil, while UK investors will be looking ahead to next week’s Bank of England meeting with inflation still sticky and growth stalling. In Asia, the strength of the rally will be tested by fresh data on trade, credit and industrial output.

For now, liquidity and narratives continue to drive markets higher. But with central banks back in play, the next leg of the rally may hinge less on AI and more on how convincingly the Fed can cut without undermining its inflation-fighting credentials.

And Finally …

Investors may comment that the market looks stretched. Jobs are softer, inflation is sticky, and equities are grinding to new highs anyway. Common sense says a correction of 5% to 10% would be healthy. But two things make me cautious about being too cautious – sentiment and cash. The AAII survey shows investors are firmly bearish, hardly the hallmark of irrational exuberance. US money market funds are holding over seven trillion dollars, which is a substantial amount of dry powder still parked on the sidelines. That doesn’t look like a market that has run out of fuel.

Overlay that with the bigger picture. The AI revolution continues to shape corporate strategy, investment cycles and productivity expectations in ways that investors can’t ignore. Fiscal stimulus is building in the background, and the Fed looks set to cut. Put it together, and you have a potent cocktail of liquidity, narrative and positioning that keeps pushing prices higher, however stretched they may look. So while risks are real and a correction would be entirely reasonable, it’s hard to fight this momentum. The wall of worry remains steep, but markets seem determined to climb it.