Bond market reacts to Fed cut and AI spending ramps up

In the US, the S&P 500 briefly touched fresh highs early in the month, supported by solid GDP growth and expectations that the Federal Reserve might be nearing the end of its tightening cycle. In Europe, however, growth concerns took the shine off performance and Asia experienced big swings.

The big standout performers for the month were precious metals, with gold and silver having large monthly gains as Fed easing drove further upside in these commodities.
 

Policy shifts

The most anticipated event of the month was the US Federal Reserve meeting. As broadly expected, the Fed delivered a quarter point cut to its main borrowing rate – its first move since late last year.

Chairman Powell characterised the move as an “insurance cut” aimed primarily to mitigate downside risks to the labour market rather than signalling a deep, aggressive easing cycle. The nuance here is that while inflation globally is falling, it has stayed relatively high in the US.
 

The rate cut effect

The bond market was immediately reactive to the Fed’s policy decision. Short-term bond yields moved lower as these tend to be more sensitive to central bank decisions. However, the longer-term yields refused to drop dramatically.

This suggests that while the market appreciates the Fed’s desire for caution, bond investors remain concerned about long-term factors such as the government debt position.

For client portfolios, this has meant modest gains in high-quality short-term bonds, while longer-term fixed income remains volatile. 
 

The AI engine roars on

The most significant strategic announcement came just days before the close of the quarter – a massive strategic partnership between Nvidia and OpenAI.

The chip giant pledged a multi-billion-dollar investment and a long-term plan to deploy 10 gigawatts of Nvidia systems – enough to continuously power over 8 million average US homes for a year. This partnership aims to deploy a network of massive AI data centres over the next four years dedicated to training and running next-generation large language models.

The market reacted swiftly; Nvidia’s shares initially jumped. While the deal confirms the acceleration of the global AI capital expenditure wave, it also prompted caution, with some analysts noting the “circular financing” structure raised risks about long-term market sustainability.
 

Key data to come

The market’s measured reaction to the Fed’s rate cut suggests cautious optimism, but this is contingent on economic data holding steady.

As we enter the final quarter of 2025, attention will increasingly turn to the upcoming releases of the US employment and inflation data. These figures will be pivotal in shaping expectations around the Fed’s next steps.

A continued moderation in inflation, coupled with stable job growth, could reinforce the case for further easing. Conversely, any signs of reacceleration in price pressures or weakening in the labour market could prompt a reassessment of the Fed’s trajectory.