Steady shifts: Navigating global crosscurrents

Market recap

In the Eurozone, the European Central Bank maintained its deposit rate at 2.00%, signalling a potential end to its easing cycle. Inflation hovered near the 2% target, while economic growth slowed markedly. Despite this, resilience was observed in private sector balance sheets and service-driven expansion, as indicated by PMI data. Political uncertainties, including trade tensions and domestic instability, added complexity to the outlook.

The United Kingdom saw the Bank of England (BoE) resume rate cuts, lowering the base rate to 4.00% amid persistent inflation above target. Economic growth moderated, and business sentiment fluctuated sharply. Labour market conditions softened, and political developments, including anticipated fiscal adjustments, contributed to cautious investor sentiment.

In the United States, the Federal Reserve enacted its first rate cut since December 2024, lowering the federal funds rate to 4.00–4.25%. This shift reflected growing concerns over labour market weakness and elevated inflation. Market expectations aligned with a more accommodative stance, anticipating further easing through year-end.

Across these regions, money market funds remained a stable investment option, offering competitive returns and liquidity amid macroeconomic uncertainty.

The global outlook for Q3 2025 underscores the importance of vigilant asset management and adaptive strategies in navigating a complex and evolving economic environment.

European market overview:

The third quarter of 2025 marked a period of cautious stability for the Eurozone, with monetary policy, inflation dynamics, and political developments shaping the investment landscape.

The European Central Bank (ECB) maintained its pause in the rate-cutting cycle, holding the deposit facility rate steady at 2.00% in both July and September. This decision followed a year-long easing phase that had seen rates fall from 4.00% to 2.00% between June 2024 and September 2025. ECB President, Christine Lagarde, described the policy stance as being “in a good place,” signalling that the easing cycle may have reached its conclusion. While inflation hovered around the ECB’s 2% target, the central bank reiterated its data-dependent approach, citing persistent uncertainties, particularly those stemming from global trade tensions.

Inflation remained broadly stable throughout the quarter, with headline figures at 2.0% in June, July, and August, before edging up to 2.2% in September. Core inflation, which excludes volatile components such as energy and food, held firm at 2.3% across the quarter, (Chart 2: Euro area - Inflation). According to ECB projections released in September, headline inflation is expected to average 2.1% for the year, a slight upward revision from the June forecast.

Economic growth in the Eurozone decelerated sharply in Q2 2025, with GDP expanding by just 0.1% quarter-on-quarter, a significant slowdown from the 0.6% growth recorded in Q1. Despite this setback, the ECB noted that the economy remained resilient, supported by strong private sector balance sheets, rising real incomes, and improved financing conditions. (Chart 3: Euro area growth - GDP – QoQ*).

The HCOB Eurozone Composite Purchasing Managers Index (PMI) indicated continued expansion throughout Q3, driven primarily by the services sector. The Composite PMI readings were 50.9 in July, 51.0 in August, and 51.2 in September, with the latter marking a 16-month high. (Chart 4).

Labour market conditions remained robust, with the unemployment rate holding near record lows, 6.2% in April and 6.3% in May. However, employment growth slowed to a 0.1% increase in Q2, and wage growth was expected to moderate in the coming months due to demographic headwinds and subdued labour demand.

Political developments added a layer of complexity to the macroeconomic backdrop. Trade tensions, particularly with the United States, remained a key source of uncertainty. The threat of increased US tariffs on EU goods, posed risks to export-heavy economies such as Italy and Germany. The ECB warned that a combination of a strong Euro and a 15% US import tariff could dampen external demand and reduce import prices. Domestically, France experienced political instability, with the resignation of its prime minister and the possibility of early elections contributing to market volatility.

For money market fund managers, Q3 2025 offered a relatively stable environment, albeit one that required vigilance. The ECB’s decision to hold rates at 2.00% provided a clear anchor for short-term yields, while inflation near target reduced the likelihood of further tightening. With core inflation remaining steady and the ECB signalling a prolonged pause, market participants broadly expect rates to remain unchanged until at least mid-2027.

*Quarter over quarter. **PMI stands for Purchasing Managers’ Indexes. PMI is an economic indicator that is derived from monthly surveys of private sector companies. An index level above 50 indicates an improvement in manufacturing activity, while an index level below 50 indicates a decline.

The third quarter of 2025 presented a complex and evolving landscape for UK investors, shaped by persistent inflationary pressures, volatile economic indicators, and a cautious monetary policy stance from the BoE.

The BoE resumed its rate cutting cycle in August, reducing the base rate by 25 basis points to 4%. This decision, passed narrowly by a 5-4 vote within the Monetary Policy Committee, signalled a tentative shift towards easing, albeit with a clear message of prudence. The September meeting saw no further change, underscoring the BoE’s commitment to a “gradual and careful” approach amid lingering inflation concerns.

Inflation remained stubbornly high throughout the quarter, consistently exceeding the BoE’s 2% target. Headline consumer price index (CPI) rose from 3.6% in June to 3.8% in both July and August, with core CPI following a similar trajectory. These figures, reflected in Chart 5, marked the highest inflation readings since January 2024.

The BoE had anticipated a peak of 4% in September, driven largely by elevated household energy costs and regulated pricing. These dynamics reinforced the central bank’s cautious stance and contributed to heightened market sensitivity around future rate decisions.

Economic growth moderated during the quarter, with gross domestic product (GDP) expanding by just 0.3% in Q2, down from 0.7% in Q1, as shown in Chart 7. The full-year GDP projection was revised to a range of 1.1–1.3%, with public sector contributions expected to outpace private investment. Key headwinds included increased employer costs from National Insurance and minimum wage hikes, as well as the lingering impact of US tariffs, which, while limited, added to the drag on output.

Business sentiment, as captured by PMI data in Chart 6, was notably volatile. July saw a dip in the composite PMI to 51.0, its lowest in two months, with services softening and manufacturing showing modest improvement.

August brought a sharp rebound to 53.0, a 12-month high, suggesting that earlier drags from tariffs and payroll costs were beginning to ease. However, September reversed these gains, with the composite PMI falling to 50.1, the lowest in five months. Services weakened further, and manufacturing output contracted at its steepest rate in six months. Construction remained in contraction territory throughout the quarter. This instability reflected broader political and economic uncertainty, with many firms deferring investment decisions ahead of the Autumn Budget.

Labour market conditions continued to soften. The unemployment rate held at 4.7% in the three months to July, but forecasts pointed to a rise towards 5.0% in the coming quarters. Wage growth showed signs of deceleration.

Political developments added further complexity. The Labour government faced internal challenges and policy reversals, which eroded investor confidence. Finance Minister Rachel Reeves confirmed the Autumn Budget for 26 November, with expectations of further tax increases to meet fiscal targets.

Despite these challenges, money market funds (MMF) continued to offer a relatively attractive proposition. With inflation elevated and the BoE signalling a slow easing path, MMFs provided competitive returns relative to the risk-free rate (SONIA), while maintaining high liquidity. For investors seeking capital preservation and yield in a turbulent environment, money market strategies remained a core component of portfolio construction.

The third quarter 2025 was defined by a pivotal shift in the Federal Reserve’s tone and trajectory, as policymakers began to actively respond to mounting signs of economic fragility.

After maintaining the federal funds rate at 4.25–4.50% for five consecutive meetings, the FOMC enacted a 25bps rate cut in September, lowering the target range to 4.00–4.25%. This marked the first policy adjustment since December 2024 and reflected growing concern over persistent labour market weakness and elevated inflation.

Labour market indicators deteriorated steadily throughout the quarter. July’s employment data revealed early signs of slowing, prompting two dissenting votes in favour of a rate cut, an unusual move that highlighted internal divisions within the committee. By August, the situation had worsened, with a significant downside surprise in employment figures. Fed Chair Powell described the labour market as “curious” during his Jackson Hole address, signalling that the Fed was prepared to ease policy to support employment. In September, the FOMC acknowledged that the unemployment rate had “edged up but remains low”, while warning that “downside risks to employment have risen”.

Inflation remained a concern, with CPI (chart 9) data showing a modest uptick. Policymakers noted that inflation had “moved up and remains somewhat elevated”, though the impact of tariffs on prices was still being assessed. The September Summary of Economic Projections (SEP) reflected a more dovish stance, revising the year-end median rate forecast down to 3.6%, implying two additional rate cuts before year-end. This was a notable shift from the June SEP, which had projected only two 25 bps cuts in total.

Market expectations aligned with this evolving narrative. By September, futures implied a 90% probability of another rate cut in October, with roughly 50bps of easing priced in for the remainder of the year.

The appointment of Steven Miran as a Federal Reserve governor, who dissented in favour of a larger 50 bps cut, further reinforced the political and economic momentum behind a more accommodative stance.

The third quarter 2025 saw the Fed transition from cautious observation to active intervention, driven by weakening labour market data, persistent inflationary pressures, and growing consensus around the need for policy support.