The Federal Reserve Signals Shift Towards Dovish Stance

For the week ending 22 August 2025

As of midday Friday, global equities rallied on dovish views of Fed Chair Powell’s Jackson Hole speech. The yield on the US 10-year Treasury note fell to 4.26% from prior week. The price of a barrel of West Texas Intermediate crude oil rose from last Friday’s $62.29 to $63.51 per barrel. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), declined to 14.57 from 15.03 last Friday.

MACRO NEWS

Fed Chair Powell’s remarks at Jackson Hole leaned dovish

US Federal Reserve Chair Jerome Powell took the stage this week at the Jackson Hole Symposium where he spoke about the potential for future rate cuts, his remarks being interpreted as dovish by the markets. Powell noted that the downside risks have started to rise in employment amid slowing supply and demand for workers. He also notes that tariff effects on consumer prices are visible, though the timing and magnitude remain uncertain. However, their current base case is for a one-time upward shift in prices, but it may take time for those effects to fully present in the economy. Overall, the Fed sees risks to the upside for inflation and risks to the downside for employment in the near term, describing it as a challenging situation for the economy. In line with the baseline outlook, Powell noted that the evolving balance of these risks may warrant for an adjustment on the Fed’s policy stance.

S&P Global Ratings affirmed the US credit rating

S&P Global Ratings has reaffirmed the United States’ credit ratings at AA+/A-1+, with a stable outlook. The agency attributed this decision to expectations of sustained US economic resilience, effective and credible monetary policy execution, and high — though not worsening — fiscal deficits. While S&P noted that the fiscal deficit is not expected to meaningfully improve, it does not foresee any substantial deterioration over the coming years. However, the agency cautioned that certain developments could prompt a downgrade. These include further increases to the already high deficits, potential political challenges that could undermine the strength of American institutions, and a potential loss of independence of the US Federal Reserve.

US and European Union announce trade agreement framework

The United States plans to maintain the 27.5% tariffs on automobiles imported from the European Union and will reduce the tax to 15% once the EU reduces tariffs on various goods, including a range of US seafood and agricultural goods. The bloc stated that it plans to introduce the new proposed legislation and if implemented, the US would retroactively apply the lower tariff beginning 1 August. The trade agreement also caps tariffs at 15% on several products, including alcohol, semiconductors, lumber and pharmaceuticals. Steel, aluminum and related aluminum products remain subject to a 50% tariff. Furthermore, the accord includes significant commitments from the EU, such the purchase of $750 billion worth of US energy and the investment of at least an additional $600 billion in the United States. Amid ongoing trade negotiations, the EU saw a decline in exports to the US in June by 10%, the lowest level since the end of 2023. The trade surplus decreased to €1.8 billion from €12.7 billion the prior month, primarily driven by weaker chemical exports.

UK inflation hits a recent high amid rising transport and food costs

UK consumer prices rose by 3.8% year over year in July, marking the highest level since January 2024. The key drivers of this rise were elevated transport costs, particularly airfares, coupled with higher prices in restaurants, food and hotels. Notably, food prices experienced a fourth consecutive annual rate increase, reaching the highest level since February 2024. The Bank of England forecasts inflation to climb further, peaking at around 4% by September before easing gradually through the rest of the year. Elsewhere, Japan’s core CPI rose 3.1% year over year in July, reaching an eight-month low but still well above the Bank of Japan’s target. The main factor was lower energy contributions as electricity and gas prices turned negative, reflecting a termination of government subsidies a year ago. Meanwhile, inflation in the eurozone remained steady at 2% year over year in July, while Canada’s CPI rose 1.7% year over year in July, slightly below consensus.

QUICK HITS

Developed markets composite flash PMIs rose in August, mostly driven by manufacturing, apart from the UK, which experienced services strength. 

US initial claims for the week ended 16 August rose slightly higher than expected to 235,000, while US continuing claims surged to 1.97 million, the highest since November 2021.

Germany’s Q2 GDP declined 0.3% quarter over quarter, weaker than the preliminary reading last month. Exports of goods fell 0.6%, driven by US tariffs while industrial production and household consumption were worse than initially anticipated.

In August, eurozone flash consumer confidence fell more than anticipated to -15.5, a four-month low for the index.

Eurozone wages grew 3.95% year over year in Q2, a slightly faster pace compared to Q1 2025.

US housing starts unexpectedly rose 5.2% in July. However, building permits missed expectations and fell for seventh time in the last eight months. US existing home sales also unexpectedly increased 2% in July to a seasonally adjusted annual rate of 4.01 million.

Canada’s retail sales rose 1.5% in June, largely in line with expectations driven by increases in all nine subsectors.

In July, UK consumer confidence reached its highest level since 17 December, driven by increases to the personal finance indicator.

China kept its one-year loan prime rate unchanged at 3% and the five-year loan prime rate steady at 3.5%, meeting market expectations. 

Canada’s July housing starts rose to 294,100 annualized units, the highest level since September 2022.

Japan’s customs exports fell 2.6% year over year in July, driven largely by declines in autos and parts as well as iron and steel — both subject to US tariffs. Exports to the US declined for the fourth straight month.

Australia’s consumer inflation expectations fell to 3.9% in August, its lowest reading since March.

German producer prices fell 1.5% year over year in July, a larger decline than anticipated.

The Bank of Indonesia cut its policy rate by 25 basis points to 5%, against expectations for a hold. Meanwhile, the Reserve Bank of New Zealand, as expected, cut its official policy rate to 3%.

EARNINGS NEWS

With about 95% of the constituents of the S&P 500 Index having reported for Q2 2025, blended earnings per share (which combines reported data with estimates for those that have yet to report) show that earnings rose around 11.7% compared with the same quarter last year, according to data from FactSet. Blended sales rose 6.4% year over year.

THE WEEK AHEAD

Monday: US New Home Sales

Tuesday: US Durable Orders, US and France Consumer Confidence

Wednesday: Germany Consumer Confidence

Thursday: US GDP (Second Preliminary), Eurozone Consumer Confidence

Friday: US PCE, GDP and CPI for several nations 

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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research.