Week ending 22nd August 2025.

As you can see from the accompanying table global financial markets closed the week on a surprisingly firm footing after a volatile few sessions dominated by US technology losses, weak retail earnings, and anticipation around Federal Reserve policy.

By Friday the S&P 500 in the US had looked on course for a sizeable weekly decline, but a sharp rally triggered by dovish comments from Federal Reserve Chair Jerome Powell at the Jackson Hole symposium lifted the index into positive territory. Markets had been braced for Powell’s remarks all week, with investors looking for clarity on the Fed’s next steps. He stopped short of promising a rate cut but struck a more cautious tone than in recent months, noting that risks to the labour market were increasing even as inflationary pressures linger. His comment that “the shifting balance of risks may warrant adjusting our policy stance” was widely read as a signal that monetary easing could come as early as September.

Powell outlined the Fed’s balancing act: tariffs are still feeding into higher prices, while tighter immigration rules are slowing labour force growth. The combination, he said, creates a difficult environment where inflation risks remain but employment could come under greater strain. Powell’s signal of potential easing amid economic headwinds was taken as a green light by markets, driving rate cut expectations to 80% and reinforcing a supportive backdrop for equities.

Also, this week Purchasing Managers Index (PMI) surveys revealed a mixed economic outlook across regions. PMI is a monthly survey-based index that gauges the health of the manufacturing and services sectors with readings above 50 signalling expansion and those below 50 indicating contraction. In the US business activity accelerated in August, with the composite PMI hitting 55.4 the strongest reading of the year and firmly in expansionary territory. Manufacturing led the way, reaching 53.3, while services growth eased slightly but remained robust at 55.4. However, input costs jumped at the fastest pace since May, driven in part by tariffs, and companies reported passing those higher costs on to consumers. Output prices rose at the quickest rate in two years.

In the UK, the FTSE 100 closed at another record high on Friday, despite a hotter inflation print earlier in the week as investors were buoyed by Powell’s dovish shift. Manufacturing remained under pressure, with August’s PMI falling to 47.3 as new orders slumped and job losses mounted. By contrast, services activity accelerated to 53.6, the fastest pace in a year, supported by firmer domestic and international demand. The resilience of the services sector, coupled with sticky inflation, prompted markets to scale back expectations of near-term Bank of England rate cuts.

European equities advanced in August, supported by hopes that lower U.S. borrowing costs could bolster global growth. The eurozone’s latest data painted a mixed picture: the composite PMI rose to 51.1, its third month of expansion and the strongest manufacturing performance in over three years. Germany extended its rebound, while France showed early signs of stabilisation. Still, consumer confidence slipped back and revised GDP figures confirmed Germany’s economy contracted 0.3% in the second quarter, highlighting ongoing industrial weakness.

In Asia, Japanese markets closed the week lower as investors reduced exposure to high-flying technology names. Chinese markets went in the opposite direction much of the rally has been driven by retail investors, with margin debt levels climbing to their highest since 2015.

UK markets are shut Monday for the bank holiday, but U.S. data and earnings will keep traders busy. Nvidia’s results on Wednesday will test the AI trade, while Thursday’s GDP revision and Friday’s core PCE inflation reading could prove decisive for September Fed expectations. Both reports will be pivotal in shaping expectations for September’s FOMC meeting.

Kate Mimnagh, Portfolio Economist