Policy support is around the corner

After four consecutive positive months, stretched equity valuations and standing on the cusp of seasonally weak month of September, the chatter about the equity markets in North America has sounded understandably cautious in the recent weeks. Nevertheless, we think a few recent developments have made the case for continued positive performance of North American equities stronger. The fixed income markets on the other hand have been choppy throughout this year despite building expectations of start of rate cut cycle at some point during this year. Concerns around re-emergence of inflationary pressures and the United States’ Federal Reserve potentially loosing its independence have been on top of Investors mind, in our opinion.

The United States’ President has been publicly mounting pressure on the Federal Reserve to cut interest rates for some time now. In a latest move to mount further pressure, the US President fired, Lisa Cook, who is on the Fed’s board to set policy rates. The accusations of mortgage fraud from the head of Federal Housing Finance Agency, William Pulte, was considered as reason enough for the US President to reach this decision. The Fed board member, Lisa Cook, however, has challenged the order and the case is now in courts. The fact that William Pulte, an appointee of the US President, has made similar accusations against his other political opponents has had investors see through this as a partisan move. This development followed shortly after accusations on Jerome Powell of lavishly spending to renovate Fed’s headquarters and calls from White House that the Fed chair should resign.

Inserting political actors in Federal Reserve board could result in decisions that favour short term political goals rather than long term stability of economy. This risk is rising at a time when the US national debt is at all time high of ~USD 37 trillion (Debt-to-GDP ratio of ~128%), and is certain to spook fixed income investors, in our view. Not surprisingly, during August, the short-end of yield curve dropped and the long-end of the curve advanced resulting in steepening of the curve (See Figure 1). In other words, short-end reacted to rising expectations of potential interest rate cut in the short-term, while long-end expressed less confidence in the resolution of the current debt situation of the United States over long-term.

Figure 1: United States yield curve steepened during August 2025

Source: Bloomberg

We think Fed’s independence is a legitimate concern and developments around this are worth watching. We also note that the US Federal Reserve Chair, Jerome Powell, indicated in his prepared remarks for the annual Jackson Hole economic symposium, that downside risks to employment are rising and shifting balance of risks may warrant adjusting the policy stance. Given that Jerome Powell had been fighting pressure from White House successfully throughout this year, we think the comments were made on legitimate concerns around economic developments rather than due to political pressure.

Several economic data points on labour market during the first week of September indicated softening of labour market and justified the opinion expressed by the United States’ Fed chair, Jerome Powell during the Jackson Hole Speech. As per Bureau of Labour Statistics’ Jobs Openings and Labour Turnover Survey (JOLTS) data, the Job openings for the month of July (reported in September) were at 7181k, lower-than-expected number of 7380k, while the layoffs were at 1808k, higher-than-expected number of 1639k. The ADP data on US private sector hiring indicated that private jobs increased by 54k in August, lower-than-expected number of 68k and were down from 106k jobs added during the month of July. For the Month of August, the Bureau of Labour Statistics data on nonfarm payrolls and private payrolls was at 22k and 38k, respectively; lower-than-expected number of 75k for both. Also, the unemployment rate increased from +4.2% in July to +4.3% in August in the United States and from +6.90% to +7.10% in Canada.

With the labour market showing signs of cooling, the central banks on both sides of the border are expected to cut interest rates in their upcoming respective meetings on 17 September. Higher inflation numbers could dent expectations of rate cuts for some market participants and could also become an excuse for markets to shed some of the recent gains. However, we think any sell-off in markets should be taken as an opportunity to add positions. Given the likelihood of economy to run hot, i.e., higher growth and higher inflation; we think investors will better be placed to beat the inflation by staying invested in risk assets rather than sit on side-lines.

Source: Bureau of Labour Statistics, Bloomberg

Vipul Arora is a Portfolio Manager with Assante Capital Management Ltd. The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd. Please contact him at 613-258-1997 or visit ofarrellwealth.com to discuss your particular circumstances prior to acting on the information above. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. Insurance products and services are provided through Assante Estate and Insurance Services Inc