Written by Millan Chauhan
In the United States, Friday’s inflation data showed that prices in August were +3.4% higher than a year earlier, in line with expectations but ahead of the Federal Reserve’s 2% target. Following the release of this report, expectations for a 0.25% interest rate hike rose sharply to 87%, well above the prior week. Kevin Warsh, chair of the Federal Reserve, faces a difficult task: the central bank’s dual mandate is to control inflation and support employment, but he must also manage the influence of President Trump. Historically, the Federal Reserve and the President have operated independently, but with Trump repeatedly demanding lower interest rates, that independence is under greater strain. Inflation has proved more stubborn than hoped, driven primarily by surging energy costs and housing pressures. Increased expectations of higher interest rates weighed on sentiment and risk appetite, and the S&P 500 Index (a measure of America’s largest companies) declined 0.9% last week.
In the UK, the economy grew 0.4% in July, well ahead of the 0% consensus – propelled higher by a dominant services sector, where technology-related industries were particularly strong. Manufacturing activity also came in stronger, growing 0.2% month-on-month – again well ahead of forecasts. Despite signs of a stronger economic backdrop, the FTSE All-Share Index (a measure of the broader UK market) fell 1.7% last week, while the more domestically exposed FTSE 250 Index fell 2.5%. The Bank of England’s Monetary Policy Committee meets this Thursday, with the August inflation report due beforehand, which could shape its view on the path for UK interest rates. Expectations are for rates to be held at 3.75%.
In Continental Europe, the European Central Bank raised interest rates by 0.25% on Thursday, its second increase this year as inflationary fears have resurfaced – linked to higher energy prices, with euro-area energy inflation reaching 14.3% in the twelve months to August. European stocks (as measured by MSCI Europe ex-UK) declined 1.9% over the week.
Global central banks are having to contend with higher input costs, which often feed through into wider inflation – including food prices. Food and energy are a different kind of cost pressure: unlike a discretionary purchase such as a new iPhone, households cannot simply go without them. Raising rates to discourage spending therefore squeezes the disposable income consumers have left, which could be detrimental to future economic growth.
In Fixed Income, the yield on the US 10-year Treasury rose to 4.97% last week, its highest level since October 2023. Higher yields push bond prices down, and the Bloomberg Global Aggregate Index (a measure of investment-grade bonds) fell 0.9%.
Broader commodity markets continued to behave independently of traditional equity and fixed-income markets. The Bloomberg Commodity Index (a broad measure of commodity prices) rose 1.7% in hedged sterling terms, supported by higher oil prices – a reminder that a multi-asset portfolio draws on several sources of return, each behaving differently.
All performance figures are stated in Sterling terms, unless otherwise specified.
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