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Also featuring commentary from U.S. Watch
August 24, 2025
Candace Browning, Head of BofA Global Research
This week we scale into a few key market debates, from the health of the U.S. and Chinese consumer to the future of auto insurance in an autonomous world, to whether Powell’s Jackson Hole speech is as monumental as the location’s backdrop.
The U.S. consumer should remain resilient as long as employment stays robust, but consumer sectors are among the most idiosyncratic in the S&P.
Brands, trends, and company-specific drivers matter most, though macro factors still play a role. BofA internal data show that low-income wage growth has fallen below other cohorts to the lowest level in years. Company commentary reinforces that these consumers are under pressure, and with Consumer Staples exposed to low-price point retailers, Head of U.S. Equity & Quantitative Strategy, Savita Subramanian, remains underweight. Tariffs are a particular challenge for low earners, and the impact of these duties led to weak consumer company guidance in July: for every three companies that guided down, only one guided up. The silver lining is that expectations are now low, creating room for positive surprises. Savita remains overweight Consumer Discretionary, noting that low-income households account for a relatively small share of spending, and if the Fed eases, the overall backdrop could turn more supportive.
In China, our August Consumer Survey shows spending momentum holding firm, with 45% of respondents reporting increased outings and spending.
Notably, lower-income households (RMB0-100k) showed the strongest increase, where 42% reported higher spending, up from 29% in June, while higher income groups moderated. Encouragingly, 46% plan to increase spending over the next six months, the highest in 16 months. With our survey closely aligned with National Bureau of Statistics (NBS) retail sales growth, Asia Economist Anna Zhou expects resilient August NBS data. Sentiment has improved alongside a rally in A-shares to levels last seen in 2021: 43% of respondents said they had already increased spending as a result of the upswing, versus just 28% during the brief October 2024 policy pivot-driven surge. However, the newborn subsidies of RMB 3,600 (~$500) per year appear insufficient to influence family planning, with 75% of currently ineligible respondents doubting it would encourage them to have children. Still, the program’s consumption lift could add ~0.2ppt annually to retail sales.
Since 2013, bears have argued self-driving cars could disrupt auto insurance, citing steep reductions in accidents.
Head of Global Thematic Research Haim Israel noted in his Autonomous Vehicle (AV) primer that AVs have already driven passengers the equivalent of a round-trip from Earth to Venus with up to a 92% drop in accidents per mile. Yet U.S. Insurance Analyst Josh Shanker highlights that historically, safety gains haven’t eliminated insurance—bodily injury and property damage claims are up ~200% since 1999, while repair costs have risen faster than accident frequency due to costly tech. Severe accident rates are flat to rising, and risks like theft, weather, or impaired drivers remain. Bears see liability shifting from drivers to vehicles, but Josh remarks that this could actually help margins as liability lines often lose money. With a tail of >200 insurers and none above 1% market share, industry consolidation looks likely.
Markets honed in on Jackson Hole last week, with a 25bp September rate cut now priced in.
BofA Global Research economists said the decision rests on Fed Chair Powell’s response to stagflationary data, though the September 5 employment report will be the bigger near-term policy driver. Historically, U.S. rates dip post Jackson Hole but reverse within 10 days. In FX, the dollar tends to trade sideways during the event, with 2022 being the exception. The 2025 reaction could prove another outlier given Powell’s more “dovish” than expected comments. Senior U.S. Economist Aditya Bhave remarked that the burden of proof is now on the data to justify avoiding a September rate cut. He believes a 4.3% unemployment rate would raise the bar for keeping rates steady. While sticking with his hold call, he warns of the heightened risk of a policy error if rates are cut as activity picks up and inflation nears 3%.
Aditya Bhave, U.S. Economist
Dovish comments
Fed Chair Powell's comments at Jackson Hole were more dovish than we and markets were expecting. He noted up front that "the balance of risks appears to be shifting" toward the labor market. And then later in his speech, the key passage was "the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance." Powell was clearly spooked by the downward revisions to payrolls, as there haven't been other major dovish developments since his hawkish July presser.
The bar is high for a September hold
Markets on Friday, August 22 priced in almost another 4bp of cuts in September on the back of Powell's comments, which indicate that the onus is firmly on the data to prevent a cut. A 4.2% unemployment rate in August, with 70k+ job growth and minimally negative/positive revisions, could keep a hold in play. A 4.1% unemployment rate would lower the threshold for payrolls, but 4.3% would raise it significantly. August data will be released on September 5. If it's a close call, August Consumer Price Index (CPI) and Producer Price Index (PPI) should also matter. We stick with our call for a hold for now. But the risks have obviously shifted meaningfully toward a cut.
The Fed is risking a policy mistake
Barring further deterioration of the labor market, we think that the Fed would risk a policy error if it were to cut rates. We see signs that economic activity has picked up after the soft patch in 1H. If that is correct, the labor market will likely also rebound. Meanwhile, the underlying inflation picture — excluding of tariffs — has not improved since the Fed started cutting last year. The lagged housing component has decreased substantially, but other components have been flat or up.
