US Economy: Weekly Commentary – September 22, 2025

US Market Review

Treasury yields diverged, with long-term rising, short-term falling. China trimmed holdings. Equities climbed, led by the “Magnificent 7” and tech. Dollar dipped, oil volatile. Gold gained, Bitcoin declined.

Treasury yields moved in opposite directions last week. Yields on longer-dated maturities increased, while those on securities maturing in less than two years declined, supporting price gains in the short end of the curve. On September 18, the U.S. Treasury executed $2 trillion in buybacks, bringing total repurchases over the past five weeks to more than $12 trillion. The 30-year yield climbed to 4.746%, its highest level since September 5.

Equity markets extended their upward trajectory. Micro- and small-cap indices rose 2.24% and 1.95%, respectively, while large-cap stocks gained 1.22%. The “Magnificent 7” increased 3.46%. Technology led all sectors with a 2.95% gain, while consumer staples lagged, falling 1.20%. The Russell 2000 joined the Dow, S&P 500, and Nasdaq 100 in hitting record highs, marking its first peak since 2021.

The U.S. dollar slipped 0.10% against the euro. WTI crude rose 0.19% for the week, supported by the Fed’s rate cut and a drawdown in U.S. crude inventories, despite weak demand indicators. Additional pressure came from higher distillate stocks, persistent housing market weakness, and early signs of labour market softening. Geopolitical risks, including Russian supply disruptions and OPEC’s pricing strategy, added to market uncertainty. Gold gained 1.05%, while Bitcoin fell 0.86%.

US Market Views Synopsis

The Fed cut rates 25 bp amid labour risks. Retail sales rose, but weak consumer confidence persists. Housing starts remain low, with limited support from price cuts and lower mortgage rates.

On September 17, 2025, the Federal Reserve cut the federal funds rate by 25 basis points as a “risk management” measure amid rising labour market risks, with Chair Powell noting slower hiring, potential AI impacts, and immigration changes. New member Stephen Miran dissented, advocating a 50bp cut and signalling support for up to 150bp of easing by year-end. GDP growth projections were raised to 1.6% in 2025, 1.8% in 2026, and 1.9% in 2027, while core PCE inflation is expected at 3.1% in 2025 and 3.6% in 2026. Retail sales in August rose 0.6% MoM and 5% YoY, led by online sales and dining, though weak consumer confidence and tariff pressures may constrain spending going forward. Housing starts and permits fell to multi-year lows, with builder sentiment subdued and the single-family pipeline down 4.8% from a year ago. Price cuts and lower mortgage rates provide limited support, and the housing sector continues to face pressure despite modest optimism from lower rates and anticipated further Fed easing.

Interest Rate Decision

The Fed cut 25 bp as a “risk management” move. Powell cited labour market risks. Dissenting member Miran favoured a larger 50 bp cut. GDP projections were raised from previous estimates.

On September 17, 2025, the Federal Reserve cut the federal funds rate by 25 basis points, describing the move as a “risk management cut” in response to rising downside risks in the labour market. Newly appointed member Stephen Miran, who previously served as an economic advisor in the White House and was involved in designing the Trump administration’s tariff plan, dissented, voting for a more aggressive 50bp cut and signalling a preference for a total of 150bp in cuts by year-end. This marked his first FOMC meeting and was notable because no FOMC member had previously held a White House role for such a long period. Chair Powell emphasised that there was no widespread support for a 50bp cut, noting the Fed is in a “meeting-after-meeting situation” and that the adjustment does not signal an urgent need for aggressive action. He highlighted that the labour market is no longer “strong,” with slower hiring partly due to immigration changes and potential effects of AI and warned that even modest layoffs could quickly raise unemployment. Growth has moderated in the first half of the year, largely reflecting slower consumer spending, and while the overall economy remains resilient, housing would require significant rate adjustments to shift, and rising default rates are being closely monitored.

The Fed’s updated projections signal real GDP growth of 1.6% in 2025, 1.8% in 2026, and 1.9% in 2027, with the federal funds rate reaching 3.4% by the end of 2026 and 3.1% by the end of 2027. Balance sheet reduction plans remain unchanged. Core PCE inflation is projected at 3.1% in 2025 and 3.6% in 2026, with goods inflation elevated due to tariffs (adding 0.3–0.4 percentage points) while service-sector disinflation continues. Powell noted that companies have largely absorbed tariff-driven costs rather than passing them to consumers, and overall inflation risks have eased since April. The Fed continues to emphasise a careful balance between supporting growth, monitoring employment risks, and keeping inflation near target, with future adjustments contingent on evolving economic conditions.

We expected this 25 bp cut, as did the market. Now, we are looking for two more cuts in upcoming meetings, amid labour market weakness, rising defaults, and more moderate growth.

Retail Sales

US retail sales rose 0.6% MoM and 5% YoY in August, led by online and dining. Weak consumer confidence and tariffs may pressure margins and spending.

US retail sales in August came in stronger than anticipated, with nominal sales rising 0.6% MoM, exceeding expectations of 0.2% MoM, and 5% YoY, reflecting firm but cautious consumer demand. Excluding autos, gasoline, food services, and building materials, the control group, which better tracks underlying spending trends, increased 0.7% MoM versus the 0.4% forecast. Online sales surged 2% MoM, clothing rose 1% MoM, and dining out increased 0.7% MoM, while furniture, health, general merchandise, and miscellaneous categories experienced declines. Retail also contributed positively to employment, adding 11,000 jobs in August as the broader economy gained just 22,000, while average weekly hours worked edged up from 29.8 to 30.0, indicating some potential labour market strength. Adjusted for inflation, retail volumes rose only 0.2% MoM, suggesting that revenue growth largely reflects higher prices rather than greater consumption. Import prices ex-petroleum rose a modest 0.2% MoM, providing no evidence that foreign suppliers are absorbing tariff costs, which may compress retailer margins as firms decide how much of the cost increase to pass on to consumers. Weak consumer confidence, driven by tariff concerns and uncertainty about job and income prospects, may constrain spending growth in Q4 to around 1% annualised, following the temporary rebound observed in Q3 after the early-April “Liberation Day” shock.

We expect rising inflation and a weak labour market, which will lead to decreased consumer spending and weigh on retail sales and overall economic demand.

Housing Sector

U.S. housing starts and permits fell to multi-year lows as builder sentiment remains weak. Price cuts and lower mortgage rates offer limited support amid a slowing market.

U.S. housing starts fell to a seasonally adjusted annual rate of 1.307 million in August, below the consensus estimate of 1.365 million. Building permits, a key leading indicator, also declined to 1.312 million, marking the fifth consecutive monthly drop, the longest streak since the Global Financial Crisis. Single-family starts and permits reached their lowest levels since July 2024 and March 2023, respectively, reflecting persistent softness in builder sentiment, which has remained negative for 17 consecutive months. Builders are balancing elevated inventories against weaker demand, constrained by affordability pressures and increased resale supply, while the single-family construction pipeline, at 611,000 homes under construction, is down 4.8% from a year ago, the lowest level since early 2021.

Despite the broader slowdown, there are signs of cautious optimism. The index tracking future sales expectations rose two points to 45, the highest since March, supported by mortgage rates falling to an 11-month low. Builders are responding to softer demand with price reductions, with 39% reporting cuts in September, the highest share since the post-COVID period. Following the Fed’s initial rate cut, further easing could help reduce financing costs for builders and stimulate buyer activity. While these factors may support demand, the overall data indicate that the U.S. housing boom has concluded and the market is entering a period of measured adjustment.

We expect U.S. housing starts and permits to remain weak. Despite price cuts and lower mortgage rates, we anticipate the sector will continue to struggle.