Wait and see

• Korea (+12.82%), emerging markets (+2.21%) and Japan (+2.14%) equities
• World small-cap equities (+1.19%) outperformed large cap (-0.07%) and World value equities (+0.42%) outperformed growth (-0.36%)

• China and India equities slid -3.52% and -1.16%, respectively
• Global real estate investment trusts fell -0.54% 

(All equity data is MSCI; all data in sterling unless stated)

US Consumer Prices Index (CPI) inflation moderated further in July. Headline US CPI rose 3.4% year-on-year, down slightly from 3.5% in June, while core inflation, which excludes volatile food and energy prices, eased to 2.5%. Both readings were in line with forecasts and down 0.1% from June. The data contributes to a slightly more dovish outlook for monetary policy following last week’s weaker labour market data –potentially increasing the chances that the Federal Reserve (Fed) will again keep interest rates on hold in September. Monthly headline CPI rose 0.1%, although housing and services inflation remained more persistent.

The figures should reassure Fed policymakers that their wait-and-see stance is being vindicated, albeit with inflation still stubbornly above their 2% target. They face a familiar balancing act: address inflation triggered by higher energy costs to prevent broader and more entrenched pricing pressures, without choking off economic growth and increasing unemployment.

On-going military action in the Middle East is a concern, with a regularly changing outlook reflective of yo-yoing energy costs. As a result, commodity price volatility could well persist. And, whilst the probability of a September rate hike reduced after last week’s data, the Fed will have another month’s payroll and inflation data to digest before rate-setters meet again next month. 

Despite the encouraging inflation data, longer-term US government borrowing costs continued to rise last week as the US Treasury auctioned $42bn of 10-year, and $25bn of 30-year, bonds. The 30year yield was 5.216%, making it the costliest long-term borrowing for the US government since 2001. With Washington continuing to run a large fiscal deficit – which needs financing through issuing more debt – investor concern about deteriorating US public finances may mount. At the current run rate, debt interest costs will account for an everincreasing proportion of government revenue, itself likely to make borrowing more expensive as a result. 

The UK economy expanded by a resilient 0.4% quarter-on-quarter in Q2, according to preliminary figures from the Office for National Statistics (ONS). The print was in line with market expectations, but suggested growth has slowed from the 0.6% recorded over Q1. Some sectors benefited from robust household spending, aided by the warm weather and summer sporting events. Exports and continued AI-related investment also drove growth. Month-on-month activity expanded by a strong 0.3% in June, confounding expectations for no growth. Monthly data can often be subject to revision, however, and May’s growth was revised down from 0.1% to 0%. That said, the UK economy is now 1.2% larger than a year ago, despite the effects of the Iran war and domestic political upheaval.

In fact, the UK economy has been the fastest-growing in the G7 over the first half of 2026, defying the International Monetary Fund’s prior warning that it would suffer the greatest economic hit from the Iran war amongst advanced economies. However, questions remain over whether the pace of expansion can be maintained. Despite resilient household demand and business activity, many forecasters predict that growth will slow. The Bank of England forecast that growth would stall in the third quarter, as temporary factors supporting recent activity unwind, and the effects of the Iran conflict weigh on demand. 

The 13% increase in the UK’s Ofgem energy price cap from the 1 July means that some prior insulation from higher energy prices will dissipate. Last week, it emerged that internal UK Treasury modelling had suggested growth could slow to 0.9% in 2026 before slumping to 0.3% in 2027 if the Middle East conflict continues. The Office for Budget Responsibility had forecast growth of 1.1% this year and 1.6% in 2027 back in March. 

Weaker growth and higher inflation compound the fiscal conundrum for new Chancellor, John Healey. Prime Minister Burnham has spent the early weeks of his premiership announcing small measures targeting cost of living pressures. But in his first Budget Healey must reconcile significant spending priorities such as housing, infrastructure and defence.

China’s Consumer Price Inflation (CPI) eased to a six-month low of 0.5% year-on-year in July, below market forecasts of 0.8% and down from June’s 1.0% print. Food prices declined for a fourth consecutive month, dropping close to -1.5% year-on-year. Non-food inflation also cooled, as global energy prices stabilised as the impact from the US-Iran war eased, despite the on-going confrontation. Core-inflation, which strips out more volatile food and energy prices, ticked down slightly to 0.9% year-on-year, from 1% in June. 

Expectations have risen that Chinese policymakers will ease more to counter the threat of deflation. Monthly consumer price data for both June and July have indicated monthly deflation, falling -0.3% and -0.1% respectively.

To combat this, last month’s politburo meeting acknowledged the need to introduce fiscal and monetary policies supporting new sources of growth. However, no significant stimulus measures were forthcoming. China’s economy expanded by just 4.3% over the year to June, below Beijing’s official annual target of 4.5–5%. 

China’s economy is uneven. Factory production and exports have remained relatively strong, but domestic weakness has persisted. China’s goods trade surplus rose over the past 12-months, with exports growing 24% in US dollar terms year-on-year in July. The rise has been powered by strong global demand for high-tech products linked to AI-related spend. However, China’s expanding trade surplus has also become a source of friction with major trading partners.

• Anthropic to reportedly list – reports suggest the AI firm may file for an initial public offering (IPO) in October. A valuation of around $2trn would make it the most valuable company flotation in history
• Heatwave problems mount – While the European summer heatwave may have helped boost consumer spending, negative economic consequences are evident. Reuters reported that several German companies have noted growing disruption from record low Rhine water levels – warning of higher costs, transport bottlenecks and curbed production
• Food price inflation – The UK's Food and Drinks Federation also warned that prolonged elevated temperatures are hitting fruit, vegetable and grain supply. Elsewhere, the ongoing Russia-Ukraine conflict continues to have a notable impact. Some forecasters have suggested food inflation could be the biggest near-term risk to domestic inflation
• Japanese dividends – Analysis of the Nikkei 225 index suggests Japanese companies are set to raise dividend payouts by 6% in 2026 – a sixth straight year of record increases. Almost half of all listed businesses are set to pay more, amid chip and AI-related tailwinds
• Chinese property sector – China is seeking to tackle a problem plaguing its real estate sector for developers and investors alike: expiring leases. More than one trillion yuan ($190bn) of non-residential property now carry leases of 20 years or less, with little transparency over whether property owners could extend them
• Oil price – Brent crude rose steadily by c. 5% last week amid the Strait of Hormuz stalemate as the US sought to increase economic pressure on Iran while maintaining its naval blockade of its ports. Meanwhile, Iran and Oman are yet to agree on reopening the waterway despite prior optimism that a deal was close
• Japanese yen – Having strengthened following coordinated intervention on the part of the US and Japan last month, the yen weakened past 159 to the dollar again last week, testing the resolve of policymakers. Such moves will raise questions over the efficacy of prevailing monetary policy, perhaps suggesting the Bank of Japan needs to raise interest rates further and faster

Disclaimer

Past performance is not a reliable indicator of future returns. Nothing herein should be construed as a recommendation to hold, buy or sell any security or encourage any investment decision. The mention of any particular asset class, sub-asset class or company does not imply that it is held, or may ever be held, in any product or service.