Party time !

September 22nd, 2025

The FED gave the green light for the party to continue. All members of the FED voted to lower interest rates by 25bp except for the incoming member Stephen Miran, who dissented in favor of a larger 50bp rate cut. But most importantly for the central bank's credibility, the two other governors appointed by President Trump in 2017 chose to side with the absolute majority and avoid being labeled "Trump's puppets". The statement said the Committee "judges that downside risks to employment have risen" and in the press conference, Chairman Powell explained that the shift in policy is for risk management, hence avoiding a sell-off in equities which would be the result if he sounded more alarmed on the state of the economy. He did not dismiss concerns over inflation, but emphasized the need to weigh the risks to each leg of the dual mandate (employment/inflation). The FED also pointed to further cuts in the next meetings, which is what gets a party going.

Those of an older age or those who like to read history know the famous "irrational exuberance" speech of then FED President Alan Greenspan in December 1996. The big rally of 1995 and 1996, which was essentially a re-ignition of the early 90s rally paused in 1994 due to the FED raising rates had pushed valuations at relatively expensive levels, making Mr. Greenspan rather nervous. The market reacted negatively at first, ignored him afterwards and then continued its journey with an unrelentless rally until the crash of 1999. Greenspan's worries proved to be by four years too early. In 2000, the now famous Mr. Shiller wrote a book titled "Irrational Exuberance", borrowing the phrase and paying tribute to the ex-FED Chairman. Mr. Shiller gave his own warning in 2007 that valuations are getting out of hand, according to his proprietary metric CAPE Shiller P/E, but nobody seemed to care about this, until they did when Lehman Brothers collapsed. We really don't want to scare our readers with the level of the CAPE Shiller P/E today.

Again, our view is that we are not in a bubble (yet), at least for the broader market although there are many spots in the market which they are. Yes, the US mega-caps trading at 30-40 times earnings are considered expensive but they were trading at 45 P/E when the bubble burst in 2000, so there is some room to grow into a bubble. Of course when you are at a party having the time of your life and having already drunk and danced a lot, you have the choice to "take a break", to have some water and sit down to assess what to do next. You are not going to be liked by your peers, for sure. Or you choose to order another and another round of shots and continue dancing till you drop. Life style is very correlated to investing, I am afraid.

Rate cuts if done for prevention/normalization of monetary policy and not as a reaction to a recession are usually supportive for equity markets. The financial media was flooded with the historical statistics which show that a rate cut outside a recession is producing positive results for the S&P500 in the following 12 months and traders jumped on the bandwagon. Small caps usually outperform the S&P500 in this scenario, and it is no surprise that the Russell 2000 rose by 2% for the week to its own record high. The scenario also calls for economic-sensitive stocks (cyclicals) to outperform Technology, a rotation which could "harm" the broad US indices in favor of the equal-weight S&P500 for example. Europe had a rather mixed week, with Eurozone equities performing well (+1.5%) but Switzerland (-0.7%) and the UK (-0.7%) were negative contributors in the region. European consumer names continued to attract flows, as the rotation into cyclicals makes even more sense in the region, with the PMIs pointing to growth and government spending on the rise.

The weekly initial jobless claims fell close to their recent average, alleviating some fears for a fast-deteriorating labor market in the US. As we had mentioned in our previous weekly review, the spike to 263k appeared to have been impacted by the Texas floods in July, with the previous week being the deadline for filing unemployment claims. This proved to be correct as last week the number dropped to 231k, the level at which the weekly claims had been hovering around for most part of this year. Therefore, for the moment the US labor market's weakness is primarily characterized by a sharp deceleration of new hirings, as seen by the monthly non-farm payrolls, the JOLTS jobs openings and other anecdotal data. There is no sign of significant staff reductions yet, which has been taken by the markets positively as it points to a scenario where new hirings have been temporarily impacted by the tariffs uncertainty and with the lowering of interest rates and more clarity ahead the situation will improve again.

US Retail Sales in August were much better than expected. The headline number rose 0.6% m/m, well above the 0.2% consensus. Control-group sales (which feed into GDP calculation) was up 0.7%, also well ahead of 0.4% m/m forecast. But we should also note that the early Labor Day holiday could have shifted some September sales into August. Overall the numbers signal a resilient consumer, as has been the case for years now despite the high prices and the high interest rates. Of course, if one digs into the details he will see that consumer spending is now driven by the top 10% in terms of wealth, with the middle class contributing less and less and the lower income citizens struggling to make ends meet.

Bonds had a volatile week with a rally into the FED meeting and a mini sell-off fright after. The USD 10yr yield dropped very close to 4%, only to return closer to 4.15% the days after the FED meeting. The German 10yr fell slightly to 2.65% and then returned closer to 2.70%. As we have mentioned several times the current EUR yields are low and duration should also be kept low (3-5 yrs), as there is a probability of higher inflation in the following 12 months. For high duration positions (7-10yrs) we would be in the top quality names or supra-nationals (AAA) as a hedge against an equity market sell-off.

Chart of the Week : The USD is at a long-term support line

The above chart shows the price evolution of the Dollar Index (DXY), which essentially is a basket of currencies (EUR, GBP, CHF, JPY, CAD and SEK) against the green buck, since 2006. The EUR has an almost 50% weight so it carries a big impact on the index. As can be observed, the USD has been on an almost perfect upward channel since 2007, with very wide booms and busts but always respecting the boundaries (red and green lines). After Trump's election and the initial rally, the dollar has been selling-off precipitously and especially after liberation day. The EURUSD has reached a high of 1.1850 from parity a few months ago, which is a similar path to Trump's first term as president, as we had early highlighted at the end of last year. Interestingly, after all these moves, the dollar index is now sitting on its long-term support line (green). We cannot forecast whether a new up cycle will start from the current levels or a structural and technical breakdown will occur which could lead to further dollar weakness and make the EURUSD spike to 1.30 and beyond. Nobody knows.

Disclaimer

• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Chart of the Week : KSH/FactSet, Photo: