Money market commentary

After the excitement of multiple central bank meetings last week, the lack of economic data this week has pushed the market back to focus on developments in the Middle East and AI concerns. Reports circulating on Tuesday indicated that talks between senior US officials and their Iranian counterparts were taking place, the first such talks since June. This was after President Trump had threatened to "annihilate" the Islamic republic while speaking at the United Nations General Assembly.

The UK will not grow as much as previously predicted, according to The Organisation for Economic Co-operation and Development. The OECD now expects the UK's economy to grow by 1% next year against an earlier forecast of 1.1% as a result of the prolonged conflict in the Middle East. The agency did upgrade its forecast for 2026 to 1.1% from 0.9% noting some "solid domestic demand growth".

Domestic business activity slowed in September, PMI data showed on Wednesday. Despite a slight improvement in the manufacturing PMI, the composite index fell to 51.7 from 52.5 the previous month, with the services sector also slowing to 51.7 in the month. Their report highlighted inflationary pressures building, with prices charged by services companies rising at the fastest pace in four months.

Events in the US have focused on the state visit of China's President Xi Jinping, with both sides claiming positive discussions without making any official statements. US Treasury yields have soared this week, the benchmark 10 year bond traded through 5%, peaking at a 19 year high of 5.2251%. The US 30 year bond also rose to levels not seen since 2004, hitting 5.5016%. Even though there was no obvious catalyst for the move other countries debt followed, Japanese government bonds surged to levels not seen since 1996 and the Australian 10 year bond nearing 15 year highs. Higher interest rates are expected in the US with the futures market now pricing in a 70% chance of back to back hikes at next months FOMC meeting.

Following the central bank actions seen last week, Norway's Norges Bank raised rates this week, a move that surprised markets and Sweden's Riksbank put markets on notice that they were likely to follow in the coming months.

Data from the Office of National Statistics showed on Tuesday that the UK's jobs market remains fragile. Despite the UK economy showing signs of growth over the summer, employers continued to cut headcount, albeit at a slower pace. Payroll employment was down 0.1% or 39,000 in the three months to June compared to the previous quarter. The overall unemployment rate was 4.90%, in line with economic forecasts.

UK inflation moved above 3% for the first time since March, data showed on Wednesday. Surging energy prices, caused by the ongoing war in Iran, pushed inflation to 3.1% in August from 2.9% seen in July. The ONS said that the increase was mainly driven by a 23% increase in motor fuel prices and a sharp rise in air fares, particularly for long haul routes. Inflation in the services sector, a number closely monitored by the Bank of England, remained unchanged at 3.4%. Core inflation, which excludes volatile items was also unchanged at 2.6%.

As was widely predicted the Bank of England's Monetary Policy Committee voted by a majority of six to three to hold official rates at 3.75%. Bank of England Governor, Andrew Bailey, warned that while higher global energy costs have had a limited effect on price and wage setting in the UK, the longer volatility continues, the bigger the impact on inflation, making higher rates more likely to ensure inflation falls back to its 2% target level. The Bank also announced that it plans to sell bonds held on its balance sheet directly to the Treasury, in tranches of about £20bln per year until 2034. The sale will require the Chancellor's approval and will reduce the amount of gilts held by the Bank to around £120bln, which is required to back the issuance of notes and coins in circulation in the UK. The Bank will pause all bond sales until April 2027 and also stop the sale of long dated bonds altogether. Bond markets reacted positively to the announcement, with 30-year bond yields falling 10 basis points, the largest fall in 4 months.

The US Federal Reserve, as expected, delivered the first interest rate rise in the country since 2023 on Wednesday. The FOMC raised rates by 0.25% to a range of 3.75% - 4% with the committee unanimous in its decision. During the press conference that followed the announcement, Fed Chair Kevin Walsh noted "The plain fact is that inflation is too high and has been for too long". Walsh was President Trump's preferred choice to succeed Jerome Powell as Fed Chair, and was widely expected to side with the President in his calls for lower rates. Asked by reporters how the President might react to the increase, Walsh responded, "I've got nothing for you on a discussion with the President." The market is now pricing in a further three increases, so it is likely that there may be some interesting discussions ahead. Trump stated later on Wednesday that he still has confidence in Kevin Walsh but also wants the central bank to slash rates to 1% or less.

In the final major central bank action of the week, the Bank of Japan raised rates to a 31 year high and signalled that it will not be the last hike in the battle to combat rising inflation. The move to 1.25% was expected, though the lack of hawkish guidance in the accompanying statement saw the Yen weaken on the foreign exchanges.

UK house prices dropped for the first time in nearly three years the lender Lloyds reported on Monday. Prices fell 0.4% compared to a year ago, the first year-on-year decrease since November 2023 and was well below the expected 0.2% rise predicted by economists polled by Reuters. The average cost of a house in the UK is £298,468, falling 0.2% or £685 compared to July. The south-east reported the largest drop in prices, falling 1.6%, with Northern Ireland remaining the best performing region where prices rose by 6.9% year on year. Slightly better news for the sector came on Thursday with the latest house price balance from the Royal Institution of Chartered Surveyors indicated that the housing market appears to be levelling off as measures of buyer demand and agreed sales moved away from recent lows. The institute reported that its house price balance rose to a five-month high of -28 in August from an upwardly revised -29 in July. Their Head of Market Research noted that key activity indicators have become progressively less negative over recent months, although their members still expect property prices to fall further over the next three months but to remain stable over a 12-month horizon.

UK retail sales growth eased in August according to the latest BRC-KPMG Retail Sales Monitor. Despite total retail sales rising 0.7% year on year during the four weeks to 29th August, sales were down from the 1.3% growth seen in July and below the 12 month average of 1.6%. Food sales remained strong, rising 2.6% compared with August last year although this was significantly lower than the 3.8% rise recorded in July. Non-food sales fell 0.8%. Big-ticket items, which include furniture and household appliances suffered as consumers prioritised smaller items such as health and beauty products. Harvir Dhillon, BRC's lead economist, noted that rising household bills were prompting shoppers to "tighten their belts".

Speaking on Tuesday to MPs on the Treasury Committee, Bank of England Governor Andrew Bailey warned that due to the renewed hostilities in the Middle East and the impact on energy prices, inflation risks remain "on the upside". Traders do not expect the MPC to sanction a rate rise at next week's committee meeting but swap markets are now pricing in two 1/4 point increases by the end of the year. Tuesday's gilt auction saw the UK issue debt at the highest level in nearly 30 years.

Better news for the UK economy this morning: GDP rose more than expected in July. The rise of 0.4% will be welcome news for the chancellor ahead of the budget next month. While today's data is welcome news for the economy, with oil approaching $110 a barrel and the knock-on effect for inflation the market remains cautious due to the fear that higher rates seem not far away.

Price pressures in the Eurozone will last longer than the bank has anticipated was the warning given by ECB president Christine Largarde after increasing rates to 2.5% at the conclusion of their council meeting yesterday. Whilst the increase in official rates had been widely expected, the tone of the accompanying statement took markets by surprised by it's hawkish tone, warning that inflationary pressures were building in many sectors of the economy. Following the committee meeting the yield on Germany's 30 year government bond rose to 5.08%, it highest level since December 2003.

The market eagerly awaits this afternoon CPI data for indications of what the Federal Reserve might do at next week's policy meeting. With events in the Middle East escalating, President Trump promising to borrow $1.3 trillion to give $5,000 to every American should his Republican party win the midterm elections, bond yields have risen overnight. The benchmark 10 year Treasury yield rose to a 3 year high in Asia, trading at 4.9708%. Markets are expecting a 0.2% rise for core US CPI this afternoon, anything higher than that could send the 10 Year Treasury yield above the psychological 5% barrier.

Resumed military strikes between U.S. and IRGC targets disrupted Qatari natural gas supply chains and pushed Brent crude futures past $95 per barrel. With global debt markets facing heavy government debt supply and expanded fiscal deficits, the renewed energy shock reignited inflation concerns and triggered a sharp bond sell-off across short and long-dated sovereign debt.

10-year Treasury yields spiked to an intraday high of 4.8122% mid-week, before pulling back as traders evaluated incoming labour and inflation data. In the UK, benchmark 10-year Gilt yields scaled past 5.25% and 30-year yields reached 5.89% (a 28-year high) before finding late-week support. This sharp steepening of the Gilt curve pushed up UK swap rates, tightening corporate borrowing channels and raising overall debt service costs.

Monetary policy expectations shifted mid-week following key central bank comments ahead of upcoming September decisions. Speaking at a Reuters event on Thursday, Fed Governor Christopher Waller indicated he is open to holding interest rates steady if upcoming August inflation data shows continued cooling toward the 2% target. However, he made clear that the door remains open for further tightening, warning that he would actively back another rate hike if inflation figures come in hotter than expected. This week CME FedWatch probabilities for a 25 bps Fed rate hike initially jumped to ~67% before easing back to ~50%. All eyes are on Friday’s U.S. nonfarm payrolls release as investors evaluate whether cooling labour data will give the Federal Reserve sufficient leeway to pause its rate-hiking cycle in September. Consensus forecasts point to a 55,000 job gain - a steady rebound following July’s surprising contraction.

In the UK, Bank of England Chief Economist Huw Pill cautioned that taking early action to raise interest rates would limit the need for more aggressive tightening down the road. Pill argued that a timely rate increase would help contain the inflation spike triggered by conflict in the Middle East before price pressures become entrenched, highlighting hawkish undertones within the MPC despite market futures assigning only a ~15% chance of a rate hike this month.

The United States dominated the macro calendar mid‑week, with Wednesday’s cluster of Tier‑1 releases: Q2 GDP (second estimate), Core PCE, Durable Goods Orders, and Personal Spending all landing on 26 August. Core PCE rose 0.2% MoM and 3.3% YoY. Inflation has now been above the Fed’s 2% target for 65 consecutive months. Consumer confidence and new home sales (25 Aug) added colour to the demand picture, while Friday’s Chicago PMI and Michigan Sentiment rounded out the week’s data flow. The real market focus, however, is Kevin Warsh’s debut Jackson Hole keynote on Friday 28 August, arriving amid elevated Treasury yields, sticky inflation, and a recent Treasury buyback intervention. Warsh is expected to avoid explicit forward guidance, making any deviation from a “neutral” tone highly market‑moving.

In the Eurozone inflation accelerated in France and Spain in August as energy prices jumped again. EU harmonized inflation was up to 2.7% in France, and 4.50% in Spain, more than double the ECBs 2% target. The Eurozone Economic Sentiment Indicator rose for a forth consecutive month in August, improving across all sectors and was above expectations. July's reading was also revised upwards.

It was a quiet week for UK data releases. The government has agreed to hand over blueprints for British-made components for the Scalp missile, a French version of the UK's Storm Shadow cruise missile - allowing Ukraine to produce the long-range weapon domestically. In response, Russia suggested it could threaten UK military bases.

The largest rise in gas prices in 4 years was the main driver for the jump in UK inflation last month. The Office of National Statistics reported that inflation rose from a 15 month low reported last month to 2.9% in the year to July. While in line with economists' predictions, this number marked the first rise in the annual inflation rate since March. The ONS noted that consumers faced other pressures alongside the largest rise in gas prices since 2022, these included clothing prices not being discounted as much and furniture prices falling by less than usual for this time of year. Core inflation which excludes volatile items, remained unchanged from last month at 2.6%. This was slightly higher than economic forecasts.

UK consumer confidence rose to a two year high in August according to a survey released on Friday by GfK. Their consumer index rose to -14 from -17 in July with four out of five confidence measures rising and only the general economic situation dipping to -40 from -39 the previous month. Also reported on Friday, UK retail sales dipped in July, following a revised increase of 0.7% in June according to the Office of National Statistic. Sales fell 0.5% during the month with clothing, on-line and household goods sales all faring badly. Clothing sales had their worst month since May 2025, falling 2.7%. Industry experts attributed the fall to retailers bringing forward discount events into June. Food sales continued to perform well in the warm weather, rising 0.5%.

The situation in the Middle East looks set to continue for the foreseeable future as President Trump ruled out an extension to the memorandum of understanding agreed in June and threatened to bomb Oman should their talks with Iran interfere with US war aims. According to a Reuters/Ipsos poll, the president's approval rating has fallen to its lowest level of the current presidency. The four day survey showed that only 33% of respondents approved of Trump's performance in the White House, while 64% disapproved. Of the people polled, 80% believe US involvement in Iran "will go on for an extended period of time".

US long term borrowing costs have risen to their highest level in decades as investor concerns about inflation and fiscal pressures across major economies weigh on the market. With no end in sight to hostilities in the Middle East, the oil price has pushed over $90 a barrel, causing renewed inflation concerns. The 30 year Treasury yield rose to 5.327%, its highest level since 2007 with total US debt topping $40 trillion for the first time. In a bid to calm markets, US Treasury Secretary Scott Bessent announced the US will double the amount of bond buybacks through to early November. Yields initially fell following the announcement but have moved back towards 5.25% this morning. The Minutes from the July Federal Open Market Committee meeting, released earlier this week, showed that 3 officials voted for an immediate 0.25% rise in rates, with nine voting to hold at the current fed funds range of 3.5% - 3.75%. The minutes further showed that many members favoured a rate hike if inflation didn't fall.

The UK economy saw another 3 months of growth in the period between April and June the Office of National Statistics data showed on Thursday. Despite the ongoing conflict in the Middle East, the UK's economy grew by 0.4%, down from the 0.6% seen in the first quarter and was in line with economists' expectations. The hot weather and the World Cup caused consumers to flock to hospitality venues pushing growth in that sector up 0.3% in June. The Chancellor, John Healy, noted that the UK had seen the "fastest growth in the G7 this year" but needs to "double down and drive growth in every postcode". Growth for the rest of the year is not expected to remain as strong, with the new Chancellor's first budget in October and fears of rising energy costs causing concern for businesses.

Further signs that the UK housing market continues to struggle came on Thursday with the latest survey from the Royal Institute of Chartered Surveyors. According to the professional body the market "remains subdued" with "little sign of meaningful recovery". Although not unusual in the summer months, new buyer enquiries recorded a net balance of -28% in July. They noted that geopolitics, domestic politics and mortgage finance costs continue to weigh on sentiment.

US inflation, released on Wednesday, rose 0.1% in July. The number was in line with many economists' forecasts and pushed the annual inflation rate to 3.4% . Core inflation, which excludes volatile items food and energy rose 0.2%. Whilst still above the Fed's inflation target, markets reacted positively to the data, with equity markets rising and bond yields falling. This coupled with the softer than expected non-farm payroll last Friday, has dampened expectations of an official rate rise in September. The CME Group's FedWatch gauge lowered it's odds to 42% for a September hike following the CPI number.

Events in the Middle East continue to keep markets guessing. Equity markets remain volatile on war and AI concerns. Oil has fallen from recent highs following news reports about the prospect of peace in the region. One news agency reported a deal between Iran and Oman that would offer Tehran control over the Strait of Hormuz. President Trump has also stated that a deal to reopen the Strait is imminent, although US officials have repeatedly insisted that they would not agree to Iran controlling access to the vital shipping channel.

It has been a light week for domestic data with only PMI and housing releases. Composite PMI, signalled private sector expansion in July, with a reading of 52.2 slightly above what economists had been expecting. The reading indicates ongoing expansion in combined manufacturing and services output. PMI data for the construction sector suggests the industry has started to stabilise. Whilst the July reading of 44.7 indicates contraction, it is a significant improvement from the 38.4 reading in June and well ahead of the 40 median forecast in a Reuters poll of economists.

Data from the lender Lloyds Bank, released this morning, showed that the average house price stood at £299,253 in July, virtually unchanged from the previous month. The average house price is now 0.1% higher than a year ago, the slowest rate of annual growth seen since November 2023. Northern Ireland, Scotland and Northern England saw the strongest annual price growth, while the South East and London continue to struggle, with prices falling in both regions.

New York Federal Reserve Bank President, John Williams speaking at an economic forum in New York, noted that he expects inflation to ease in the coming months and hit its 2% target in 2028. Although he also warned that if inflation didn't fall the central bank would increase official rates to ensure "price pressures return to target". These comments come before this afternoon's important US payrolls report. The consensus forecast is for a 80,000 gain. The market is split as to the direction the Fed will take on rates with a 54% chance of a hike expected at their next meeting.