The Month Ahead

Global equity markets continued to climb in September, with major US indices like the S&P 500 and Nasdaq Composite hitting fresh record highs, alongside several Asian markets including Japan’s Nikkei 225, South Korea’s Kospi, and Singapore’s Straits Times Index. At the time of writing (18 September), the S&P 500 Index was up around 2.3% month-to-date.

The rally was supported by resilient corporate earnings, enthusiasm around AI, and the US Federal Reserve (the Fed) cutting interest rates for the first time this year. While annual inflation in the US edged up to 2.9%, a larger-than-expected monthly rise in consumer prices reminded investors that inflation risks haven’t fully faded. At the same time, softer producer price data and signs of labour market weakness helped reinforce the case for rate cuts.

Bond markets also gained in anticipation of, and following, the Fed’s decision to cut interest rates, while New Zealand bonds rose after some weak growth data increased the likelihood of an interest rate cut in October. In Europe, French financial markets faced pressure after Prime Minister Bayrou lost a confidence vote, triggering political uncertainty and a sell-off in French equities.

Meanwhile, the Trump administration’s tariff regime faced a legal setback, with the US Supreme Court agreeing to hear a challenge to the legality of the emergency powers used to impose sweeping duties.

The Fed cut its benchmark interest rate by 25 basis points at its September meeting, lowering its target range to 4.00-4.25%. The move was widely expected and marked the first rate cut of 2025, as policymakers responded to signs of a softening labour market and persistent economic uncertainty.

In its post-meeting statement, the Fed acknowledged that job gains have slowed and inflation remains somewhat elevated, but judged that downside risks to employment have increased. The decision followed weaker jobs data, with unemployment rising to 4.3% in August – its highest level since 2021.

The Fed’s updated projections point to two more rate cuts before year-end, though views within the committee were divided. One member voted for a larger 50 basis point cut, while others signalled a more cautious approach. Chair Jerome Powell reiterated that future decisions would remain data dependent.

New Zealand’s economy shrank by 0.9% in the June quarter, much more than expected. The decline was driven by weaker activity in manufacturing and construction, while services were flat.

The data confirms that economic growth has stalled and adds to signs that households and businesses are feeling the pressure. Unemployment rose to 5.2% in the June quarter, and inflation remains within the RBNZ’s 1–3% target band, at 2.7% year-on-year.

With the economy going backwards and signs of softness across key sectors, the Reserve Bank is widely expected to cut interest rates when it next meets on 8 October.

Geopolitical risks remain front of mind for investors. In the US, President Trump’s sweeping tariff regime is facing a major legal test. A federal appeals court recently ruled that many of the tariffs – which were imposed under emergency powers – may have exceeded presidential authority. The Supreme Court is now set to hear arguments in early November. While the tariffs remain in place for now, the court’s decision could have wide-ranging implications for trade policy and global markets.

In other trade related news, the US finalised an agreement with Japan. The deal includes a 15% baseline tariff on most Japanese imports. Meanwhile, Japan’s Prime Minister resigned ahead of an internal party vote that could have seen him forced out.

The fighting in Ukraine intensified, with recent Russian strikes reaching near NATO borders. In the Middle East, conflict in Gaza has escalated again, further adding to global uncertainty. Investors will be watching for any developments that could affect energy markets or broader sentiment.

Our positioning has been unchanged following the series of adjustments we made in August – which included closing our underweight positions in US equities and our overweight positions in US government bonds and the New Zealand dollar. The decision to exit these positions reflected a reassessment of risks and market resilience, particularly around AI-driven momentum, strong corporate earnings, and shifting central bank signals.

We remain neutral across equities, bonds, and currencies, reflecting the current balance of risks and opportunities. Elevated valuations, persistent geopolitical tensions, and signs of a softening in the macroeconomic data argue for caution. At the same time, resilient corporate earnings, sustained technological innovation, and continued capex investment provide underlying support. In this environment, we believe a neutral and flexible approach remains prudent – focused on preserving capital, managing risk, and staying prepared to respond as clearer opportunities emerge.