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Inflation And Expectations

Market Update

22.09.2025

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What happened last week?

US

  • The Fed cut interest rates and signalled more reductions to come.

UK

  • Startup Nothing raised $200 million to build AI devices.

China

  • A weak string of data sparked new worries that the economy might fall short of its growth target.
  • The government banned tech companies from buying Nvidia’s AI chips.

Why It Matters

The Fed cut interest rates by 0.25 percentage points last week – its first trim of the year and right in line with what markets had priced in. One policymaker had pushed for a bigger cut but was outvoted. That said, the Fed signalled it’s likely not done with the scissors yet: it pencilled in two more reductions by year-end. It’s not hard to see why. Signs of labour market weakness have been piling up, with job creation slowing, past figures being revised sharply lower, and unemployment ticking higher.

British startup "Nothing" just raised $200 million at a $1.3 billion valuation, doubling down on its plan to build “AI-native” devices designed with AI at their core. The firm’s eye-catching see-through gadgets have already won over a niche fanbase, sending its sales up 150% last year to $500 million. With just seven million devices sold so far, it hasn’t exactly made a dent in a market that ships over a billion smartphones annually. But it’s betting that genuinely new hardware – not just smarter phones – could unlock big opportunities down the line.

China’s economy hit a rough patch in August, with factory output, investment, and retail sales all missing expectations. Consumer confidence took a hit, too, as youth unemployment stayed high and home prices continued their slide. Add deflation and cooling exports (partly thanks to new tariff threats), and momentum was clearly fading. That’s a worry, especially with the government holding off on fresh stimulus. In the meantime, policymakers have cracked down on overcapacity in hot sectors like EVs and solar panels – and that could help the economy in the long run, but it risks more pain before any potential gain.

The Chinese government banned the country’s tech giants from buying Nvidia’s tailored chips, forcing them into the arms of domestic alternatives. Fortunately, China’s top chipmaker SMIC has just started testing a homegrown advanced lithography machine – a big step in its bid to sidestep US export bans on high-end semiconductor tech. While the chipmaking tool’s technology is not as advanced as market leader ASML, it is part of a broader push to build a self-sufficient AI supply chain.

The Focus This Week: Inflation And Expectations

The personal consumption expenditures (PCE) index is a broad measure of consumer prices – and it happens to be the US central bank’s favourite inflation gauge. That’s because, compared to the consumer price index (CPI), it’s more comprehensive and flexible, which makes it more accurate overall.

The PCE’s all-items inflation rate peaked at 7.2% in 2022 and has since eased, hovering for most of the past two years between 2% and 3%. It held steady at 2.6% in July, and economists expect August’s data, out this Friday, to show an uptick to 2.7%. They expect the core measure – which strips out volatile stuff like food and energy – to stay unchanged at 2.9%. If that happens, it’s unlikely to cause too much concern, especially given that many economists have been warning about a sharper rebound in inflation due to steep new taxes on imports.

That said, inflation’s still stubbornly above the Federal Reserve’s (Fed’s) 2% target. Americans’ inflation expectations have surged this year. When people and businesses anticipate higher prices, they adjust their behaviour: workers push for bigger wages, companies raise prices in advance, and consumers rush to buy things before costs increase. All of that can make inflation a self-fulfilling prophecy. That’s why traders will also be watching the US consumer sentiment report (due Friday, too), which will shed more light on Americans’ short- and long-term inflation expectations.

A bigger-than-expected rise in the PCE index or a sharper-than-anticipated increase in inflation expectations could give the Fed pause. Just last week, citing mounting signs of labour-market weakness, the central bank delivered its first rate cut of the year and signalled two more to come. But any hint that inflation might be regaining its momentum would complicate those plans, forcing policymakers to weigh the trade-off between supporting the labour market with lower borrowing costs and reigniting price pressures as a consequence.

The Week Ahead

  • Monday: China loan prime rates announcement, eurozone consumer confidence (September).
  • Tuesday: Eurozone PMIs (September), UK PMIs (September), US PMIs (September). Earnings: Micron Technology.
  • Wednesday: Japan PMIs (September).
  • Thursday: Eurozone M3 money supply (August), US trade balance (August), US durable goods orders (August). Earnings: Accenture, Costco.
  • Friday: US personal income and outlays (August), US consumer sentiment (September), US PCE price index (August).

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