The final week of September 2025 delivered a complex tapestry of market movements, with investors grappling with sticky inflation data, geopolitical tensions, and the looming specter of a U.S. government shutdown.

Inflation Concerns Resurface

The week's most significant development was the US PCE inflation print which cane in at 2.9% year on year (ex volatile items) which was the same as the previous month and in line with expectations but above the Fed's 2% target. This echoed the Australian August CPI the week before which surprised to the upside at 3.0% year-on-year, up from 2.8% in July. Accordingly, the Reserve Bank kept rates on hold at 3.6% on Tuesday, with Governor Bullock acknowledging that September quarter inflation may exceed August forecasts. Expectations of the pace and extent for cuts in the US have also receded over the past week.

Equity Markets Find Late-Week Support

U.S. equities staged a Friday recovery after mid-week weakness with major indices still finishing level for the last week. The Nasdaq lost ground at a faster pace at the end of last week, with technology stocks underperforming as higher-for-longer rate expectations took hold.

Chinese equities outperformed, with the CSI 300 gaining over 1% for the week. September PMI data showed manufacturing expanding to 51.2, driven by resilient export demand despite ongoing trade tensions. The People's Bank of China also signalled its displeasure with recent yuan weakness through its daily fixing mechanism, supporting regional currencies.

Bond Yields March Higher

Treasury yields rose , particularly at the front end where five-year yields while Australian 10-year yields jumped 14 basis points for the week to around 4.35%, reflecting both domestic inflation concerns and global bond market pressures. The moves suggest markets are recalibrating expectations for less aggressive monetary easing cycles globally.

Currency Markets Reflect Diverging Policies

The U.S. dollar strengthened against most major currencies, with the DXY index gaining 0.5% despite Friday's pullback. The Australian dollar lost 0.8% to finish near 65.4 U.S. cents, while the yen showed surprising strength on speculation the Bank of Japan may hike rates as early as October. The Euro remained under pressure from weak German business confidence data and persistent economic headwinds.

Commodities Tell Different Stories

Oil prices surged over 5% for the week, with Brent climbing above $70 per barrel on Middle East tensions, before pulling back on reports OPEC may increase production. Gold continued its record-breaking run, repeatedly hitting new highs as investors sought haven assets amid mounting uncertainties. Meanwhile, iron ore has been steadily strengthening in recent weeks and months implying greater optimism around the global economy.

Looking ahead, markets face immediate challenges with the U.S. government shutdown deadline at midnight Tuesday and Friday's crucial non-farm payrolls report potentially delayed if no resolution emerges. With inflation proving stickier than hoped and growth showing unexpected resilience, the "higher for longer" narrative appears increasingly entrenched.

Market Summary: 3rd Quarter 2025

Looking back over the past quarter  headlines might have suggested a tumultuous period for global markets, dominated by escalating trade tensions, shifting central bank policies, and mixed economic signals across major economies.

Trade Wars Intensify

President Trump's tariff policies created the quarter's most significant headwind. After extending trade deal deadlines multiple times, the administration imposed sweeping tariffs, 25% on major trading partners like Japan and South Korea, and baseline rates of 15-20% on the EU. Average U.S. tariffs jumped from 2.3% to 15% within months. While some deals were struck (notably with the EU and Japan), they often represented worse terms than pre-existing arrangements. Markets initially rallied on "tariff relief" before reality set in that these agreements still represented significant trade barriers. Ultimately however optimism around AI, a strong reporting season for the U.S. tech majors and abundant liquidity meant that markets continued higher throughout most of the quarter. Gold hit record levels above $3,800/oz, while oil weakened below $67/barrel on demand concerns.

The quarter ended with increased volatility as markets grappled with the sustainability of gains amid sticky inflation, higher-for-longer interest rate expectations, and potentially mounting inflationary pressures and a slowing U.S. economy heading into Q4.

Conflicting Economic Signals

The U.S. economy showed surprising resilience despite weakening employment data. July's dismal jobs report (just 73,000 added, later revised down to 22,000 by September) contrasted sharply with strong retail sales and corporate earnings, particularly from mega-cap tech companies investing heavily in AI infrastructure. However, this strength appeared increasingly driven by front-loading activity ahead of tariffs and substantial foreign capital inflows rather than underlying fundamentals.

Australia also demonstrated unexpected economic resilience, with stronger-than-expected GDP growth and a robust trade surplus powered by surging gold exports.

Liquidity has probably been the dominant factor

At the end of the day (or quarter) U.S. markets have ultimately found support from a confluence of favourable trade, capital flow, and liquidity dynamics. The unexpected resilience of U.S. trade flows as investors, consumers and companies front ended tariffs combined with strength in services (tech) exports has resulted in a record and widening U.S. current account deficit and capital inflows. This has been amplified by broader liquidity conditions and downwards pressure on rates. Additionally, flush money market funds, healthy corporate cash balances, and steady institutional flows have maintained a supportive technical backdrop for risk assets. Together, these factors have created a constructive, some might say quite fizzy environment that has helped markets grind higher despite macroeconomic uncertainties and already high valuations. In this weeks video we discuss with Andrew Hunt the extent to which these developments have seen him come off the inflation/deflation fence, something he has felt was on a bit of a knife edge. Spoiler alert: He thinks this liquidity wave still has some energy in it but may lead to inflation and slower growth next year.