September was defined by a renewed tightening of monetary policy as the energy shock intensified. Both the Federal Reserve (Fed) and the European Central Bank (ECB) raised rates, with Brent crude topping $107 per barrel mid-month on fears over Middle East supply. Government bonds sold off sharply. The yield on the 10-year US Treasury rose 54 basis points (bps) over the month, the most since September 2022, and has now risen for seven consecutive months for the first time since 2011. Equities proved more resilient in the US than in Europe.
In the US, strong data and firm inflation preceded the Fed’s first rate hike since July 2023. Labour market data surprised to the upside, with August nonfarm payrolls rising by 162,000 versus 53,000 expected. August consumer prices rose 3.4% year-on-year, in line with expectations, but core prices rose 0.3% month-on-month versus 0.2% expected. The Federal Open Market Committee (FOMC) then raised the federal funds target range by 25 bps to 3.75%–4.00% in a unanimous vote. Updated projections lifted the median year-end 2026 rate to 4.1%, and Chair Warsh said inflation had been "too high and has been for too long". Late in the month, downward revisions to personal consumption expenditures (PCE) data eased pressure for an October move, with core PCE inflation at 3.0% year-on-year versus 3.3% expected. The 30-year yield still reached a post-2002 high of 5.63%. The S&P 500 ended the month down 0.45%; meanwhile, the yield on the 10-year US Treasury ended the month at 5.29%, its highest since 2007.
In Europe, the ECB raised its deposit rate by 25 bps to 2.50%, its second hike since the Iran conflict began. Staff projections see headline inflation averaging 3.0% in 2026 and remaining above target through 2027. Price pressures showed few signs of easing. September Harmonised Index of Consumer Prices surprised to the upside in Germany, France and Italy, at 3.3%, 3.4% and 4.1% year-on-year respectively. The euro-area flash composite Purchasing Managers’ Index (PMI) pointed to the fastest pace of growth in almost three-and-a-half years. In France, the yield premium on 10-year government bonds over Bunds widened to 127 bps, its highest since 2012, on concerns over fiscal slippage and political uncertainty ahead of the 2027 budget and presidential election. In the UK, the Bank of England (BoE) held Bank Rate at 3.75% in a 6–3 vote, with three members preferring a hike, as August inflation rose to 3.1% year-on-year. A revised quantitative-tightening plan, retaining £120 billion of the longest-dated Gilts, eased long-end supply concerns. The yields on 10-year Bunds ended the month at 3.59% and 10-year Gilts at 5.42%.
