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Introduction
July saw mixed performance from global equity markets, amid a sharp AI-driven tech sell-off that weighed on returns from the US market, notably the tech-heavy Nasdaq index. UK markets rose, as did some regional European indices, benefiting from the rotation away from AI-linked companies. Asian and Global Emerging Markets also declined as they were also impacted by the falls in AI-related stocks. Fixed income markets fell as energy prices rose due to renewed US-Iran tensions.
Economic Overview
UK
Bank of England and Interest Rates
As expected, the Bank of England kept interest rates at 3.75%, but the 6-3 vote split differed to the forecasted 7-2. The three dissenters preferred a 0.25% increase, noting that inflation had been above its 2% target for almost all of the past five years and this increases the chances of damaging second round effects, whilst the majority stuck with the wait-and-see approach. Governor Andrew Bailey said there had been no change in the overall thinking about the need for higher borrowing costs, stating that the central bank was not edging towards a hike. The BoE’s latest projection shows inflation rising to 3.2% later this year and remaining above target until early 2028, assuming energy prices follow market expectations and limited spillover into pay and price-setting.
Economic Growth
The UK economy grew 0.1% in May, as expected, reversing April’s 0.1% contraction. Growth was driven by a 0.3% rise in services, while industrial production and construction fell 0.5% and 0.8% respectively. For the three months to May, the economy expanded by 0.7%, ahead of the 0.5% forecast but down from the revised 0.8% in the previous period. Year-on-year growth slowed to 1.3%, below the 1.4% forecast but the strongest since July 2025.
Unemployment & Labour Market Statistics
Data showed the labour market appeared to be stabilising, albeit at weak levels. The unemployment rate was unchanged at 4.9% in the three months to May, slightly below the forecasted small increase to 5%. Vacancies fell by 7,000 to 712,000 in the three months to June.
Annual regular pay growth rose 3.4% in the three months to May, matching both expectations and the previous period, or 0.3% after inflation. Private sector wage growth, watched closely by the Bank of England, was unchanged at 2.9%, its weakest since 2020. Public sector pay growth was 5.5%, affected by the timing of pay awards, while Total pay, including bonuses, rose 4.3%, or 1.3% in real terms.
Inflation
UK CPI inflation slowed from 2.8% in May to 2.6% in June, the lowest since March 2025 and below the forecasted 2.7%. Transport inflation eased, driven by a 2% fall in motor fuel prices, while food inflation slowed to 1.7% from 2.2%. Inflation also eased for alcohol and tobacco, and prices fell for footwear and furniture and household goods.
Core inflation held at 2.6%, just above the expected 2.5%. Services inflation, a key BoE measure of domestically generated inflation, eased from 3.7% to 3.6%, slightly above the 3.5% forecast, while core goods inflation slowed from 2% to 1.7%.
US
Federal Reserve and Interest Rates
As expected, the Federal Reserve held interest rates at 3.5%-3.75%, though three of the 12 committee members preferred a 0.25% rise. New Fed Chair Kevin Warsh pledged to lower inflation but gave no clear signal on next steps, noting that a central banker facing a steady job market and rising underlying inflation would be more inclined to tighten policy. He said that interest rates could be part of the solution, but not necessarily in isolation, and stressed the committee would act when necessary.
Economic Growth
Advance data showed US annualised economic growth slowed to 1.5% in Q2 from 2.1% in Q1, below the 2.1% forecast. Consumer spending, which accounts for more than two thirds of economic activity, rebounded to 3.2% from 0.5%, while AI-related investment supported a 15.2% rise in equipment spending. Structures investment contracted for a tenth consecutive quarter, intellectual property growth slowed, but residential investment rose for the first time in six quarters. Net trade reduced growth by just over 1%, as exports slowed and imports remained strong. Government spending fell, and private inventories subtracted 0.67% from GDP.
Inflation
US CPI unexpectedly fell by 0.4% in June, the first decline since April 2020, versus forecasts for a 0.1% decline and May’s 0.5% gain. The drop was driven by a 5.7% fall in energy prices, including a 9.7% decline in gasoline, though gasoline remained 26.7% higher year-on-year. Food prices rose 0.2%, matching May. Annual CPI slowed to 3.5% from 4.2%, below the 3.8% forecast.
Core CPI was unchanged in June after rising 0.2% in May. Motor vehicle insurance fell 2%, shelter costs rose 0.1%, the smallest monthly gain since January 2021, and owners’ equivalent rent rose 0.2%, while hotel and motel prices fell 2.3%. Core goods prices fell 0.1% for the second consecutive month, including a 0.6% drop in apparel. Annual core CPI slowed to 2.6%.
Europe
European Central Bank and Interest Rates
As expected, the European Central Bank (ECB) left its interest rate unchanged at 2.25%. Citing the widening Middle East conflict, it said it was “closely monitoring the intensity and duration of the shock, as well as its indirect and second-round effects”. The ECB added that energy prices remained volatile but near June projection levels and well above pre-conflict levels, with the full inflationary impact still to come.
Economic Growth
Eurostat’s flash estimate showed the Eurozone economy grew by 0.4% quarter-on-quarter in Q2, beating the forecasted 0.2% and rebounding from Q1’s 0.2% contraction. Growth was supported by AI-related investment, government spending and one-off factors that helped offset the impact of the Middle East conflict and higher energy prices. Spain led the major economies with 0.7% growth, followed by the Netherlands at 0.6%, while Germany, France and Italy each grew 0.2%. Year-on-year growth was 1%, well ahead of both the 0.5% forecast and Q1’s upwardly revised 0.5%.
Inflation
Eurozone inflation fell by more than expected in June, declining from 3.2% to 2.8%, lower than the forecasted 3%. Energy inflation slowed sharply from 10.8% to 8.5%, whilst price growth moderated for non-energy industrial goods and food, alcohol and tobacco. Services inflation eased to 3.2% from 3.5%. Annual core inflation, which excludes prices for energy, food, alcohol and tobacco, slowed from 2.6% to 2.4%.
Asia and Emerging Markets
Japan
The Bank of Japan (BOJ) left its interest rate unchanged at 1%, matching expectations, but warned for the first time that underlying inflation could exceed its target and that future policy discussions would focus on upside price risks, suggesting the chance of a September increase. One dissenter favoured a 0.25% rise. Governor Kazuo Ueda said delaying necessary policy action could increase overshoot risks and hurt the economy, adding that such risks were “too big to ignore”.
China
The National Bureau of Statistics (NBS) said China’s economy grew 4.3% year-on-year, slowing from the 5% rate in Q1 whilst also below the forecasted 4.5%. It was also the weakest rate of annual growth since Q4 2022. There was support from strong manufacturing and exports, but soft domestic demand, subdued private investment and the prolonged property downturn weighed on activity. The NBS stated that external uncertainties remained elevated, while the economy continued to face an imbalance between robust supply and weak demand.
Market Overview
CR = Capital return; LC = Local currency
Source: Lipper for Investment Management
Past performance is not a reliable indicator of future performance
UK equities performed well in July, with both the FTSE 100 and FTSE 250 posting decent gains. The FTSE 100 reached a new intraday high during the month, supported by the rotation out of global semiconductors and AI-linked stocks, in which the UK has less exposure. The higher weighting to the energy sector was beneficial amid a rise in oil prices, whilst financials also performed well. The mid cap FTSE 250 produced the stronger gain as it was also boosted by improving sentiment towards UK domestic companies as well as strong stock specific rebounds.
US equities, as shown by the S&P 500, finished July nominally lower, but there was considerable variation in performance at a sector level. Technology stocks finished sharply lower as investors turned more selective over the AI-theme, whilst energy was the strongest performing sector, with financials benefitting from broadly favourable earnings updates. European markets, as demonstrated by the FTSE World Europe ex UK Index, recorded a small gain, as again the energy and financial sectors outperformed technology. The Japanese Nikkei 225 Index suffered a sharp decline, weighed down by the global sell-off in AI-related shares.
Asian markets fell, as shown by the loss in the broad MSCI Asia ex Japan Index. in July, although this masked regional diversion in performance. Although some indices recorded gains, including Hong Kong, China and Singapore, these were more than offset by the weakness in North Asia’s technology-heavy markets, with Korea seeing a sharp fall while Taiwan also suffered a loss. Emerging markets similarly declined, as shown by the fall in the broad MSCI Emerging Markets Index. Whilst there were gains in some regions, such as Latin America, these were not sufficient to offset the losses in Asia.
UK government bonds (FTSE Actuaries UK Conventional Gilts Index) declined in July as fixed income markets came under pressure from renewed US-Iran tensions that drove oil prices higher and reignited concerns over inflation and the direction of monetary policy. Gilts were also impacted by domestic political concerns, although they stabilised following the appointment of John Healey as Chancellor and the renewed commitments to fiscal discipline. Sterling investment-grade corporate bonds also fell, reflecting the impact from rising government bond yields, although they outperformed gilts.
This update is intended to be for information only and should not be taken as financial advice.
CA13652 Exp:08/2027
