Money market commentary

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.