Markets get a reminder that central banks still matter

The past week delivered a familiar lesson to investors: however exciting the growth story, the direction of interest rates still sets the tone for financial markets. Equity markets had been riding high on strong corporate earnings, enthusiasm around artificial intelligence, and hopes that inflation was cooling. That optimism met resistance this week from firmer economic data, higher energy prices, and a more hawkish tone from central banks — bringing the “higher for longer” narrative firmly back into focus.

Europe: The ECB Takes Centre Stage

All eyes in Europe are on the European Central Bank, where a quarter-point rate rise now looks highly likely. The reasoning is straightforward: eurozone inflation has moved in the wrong direction, climbing to 3.3% in August on the back of higher energy costs. The region remains particularly exposed to disruption in oil, gas, and refined product supply given how energy-import-dependent it is, and continued conflict in the Middle East has only added to policymakers’ concerns that a temporary energy shock could broaden into more persistent price pressure.

For investors with exposure to European government bonds, banks, and rate-sensitive equity sectors, the tone struck by ECB President Christine Lagarde at this week’s press conference may matter just as much as the rate decision itself.

Political risk has also crept back onto the European agenda. The Alternative for Germany party secured a historic victory in Saxony-Anhalt, finishing well ahead of Chancellor Friedrich Merz’s conservatives, though short of an outright majority. Even if markets shrug off the immediate result, it signals a more fragmented German political landscape — with potential knock-on effects for fiscal policy, EU cohesion, and confidence in Europe’s largest economy.

The US: A Resilient Jobs Market Complicates the Picture

Sentiment in the US shifted after Friday’s jobs report. Nonfarm payrolls rose by 162,000 in August, comfortably ahead of forecasts of around 55,000, while unemployment held steady at 4.1%. On the surface, that is good news — a resilient labour market supports consumer spending and lowers recession risk.

But the details give the Federal Reserve more, not less, to think about. Wage growth of 3.1% remains broadly consistent with the Fed’s inflation target, so it isn’t alarming on its own. Even so, traders quickly raised the odds of a September rate move, and short-dated Treasury yields rose as investors reassessed the path ahead. The real swing factor now is upcoming US inflation data: a hot reading would reinforce the case for the Fed to act, while softer numbers would still leave officials with a credible case to stay on hold.

Taken together, the broader market signal this week was mixed rather than negative. Stronger growth is supportive of earnings, but it also raises the possibility that rate cuts get pushed back — or that rates rise again before they fall.

Commodities Feel the Squeeze

Precious metals faced similar pressure to bonds this week. Gold fell late in the week as the US dollar strengthened and jobs data revived expectations of higher rates, while silver also weakened after a volatile stretch. For portfolios that hold gold and silver as a hedge, the underlying case remains intact: the drag from higher yields and a stronger dollar is being offset by geopolitical uncertainty, ongoing inflation concerns, and continued demand for portfolio protection.

Chart of the Week

The chart illustrates how quickly market pricing has shifted. Where investors had priced in fewer than one rate move at the start of the period shown, expectations have since built steadily toward two additional quarter-point increases by early 2027 — a clear reflection of the “higher for longer” theme reasserting itself across rates markets.

Portfolio Performance Snapshot

Weekly returns were modest across the board, with none of the three model risk profiles outperforming their Morningstar benchmarks over the week. The Growth portfolio led on an absolute basis but still trailed its benchmark, while Conservative and Balanced also posted small excess-return shortfalls.

Looking Ahead

The week ahead in Europe centres on the ECB meeting, where investors will be watching closely for any signal on whether September’s expected rate rise could be the last of the cycle, or whether further moves may follow later in the year. In the US, consumer and producer price inflation data will be pivotal ahead of the Federal Reserve’s mid-month decision — the key question being whether last week’s stronger jobs data was simply a reassuring sign of resilience, or an early signal that central banks need to tighten the screws again.

For now, the sensible stance remains to stay well diversified and alert rather than reactive. Earnings remain solid, the technology theme continues to support markets, and recession fears are not currently dominating investor sentiment. That said, September is seasonally the weakest month of the year for equity performance, and markets remain sensitive to any suggestion that rates may need to rise further.

At NEBA Private Clients, we continue to monitor these developments closely on behalf of our clients, helping ensure portfolios remain appropriately positioned as the interest rate and inflation picture evolves.

This article is based on insights and analysis provided by David Gorman of TEAM.