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Introduction
Global equities broadly rose in August, led by gains in the US and technology-orientated Asian markets amid strong earnings updates and renewed optimism over the AI theme. The FTSE 100 lagged as rising bond yields weighed on sentiment, whilst strength in sterling limited gains. Fixed income markets finished with small losses as inflation remained sticky and energy prices stayed at elevated levels.
Economic Overview
UK
Economic Growth
Preliminary estimates showed the UK economy grew 0.4% quarter-on-quarter in Q2, matching expectations but slowing from 0.6% in Q1. Services grew 0.5% compared with Q1’s 0.8%, whilst industrial production was flat having grown 0.2% in Q1, with gains in manufacturing and mining and quarrying offset by declines in other sub-sectors. Construction rose 0.3%. Growth was supported by the 1.2% rise in gross fixed capital formation, together with a 0.3% increase in household consumption. However, government spending fell by 0.3%. Annual growth was 1.2%, beating both Q1’s 0.9% expansion and the forecasted 1.1%.
In June, the economy grew 0.3%, well above the forecasted flat reading and follows May’s 0.1% expansion. Growth was solely driven by the 0.4% rise in services, which was partially offset by 0.2% and 0.1% contractions in industrial production and construction respectively.
Unemployment & Labour Market Statistics
Labour market data showed further slowing, with weaker private sector earnings growth and fewer vacancies. Unemployment held at 4.9% in the three months to June, against a forecast fall to 4.8%. Vacancies fell to 707,000 in the three months to July, the lowest level outside of the pandemic since late-2014.
Annual regular pay growth rose by 3.5% in the three months to June from 3.4%, while inflation-adjusted growth was 0.7% as inflation fell. The increase was driven by 6.1% public sector pay growth, boosted by the timing of NHS awards. Private sector wages, closely watched by the Bank of England, grew 2.8%, the weakest pace since the three months to October 2020. Total pay, including bonuses, grew 4.1%, or 1.3% in real terms.
Inflation
UK Consumer Price Index inflation rose from 2.6% in June to 2.9% in July, matching forecasts, reaching a four-month high and slightly exceeding the Bank of England’s 2.8% projection. The rise largely reflected Ofgem’s 13% energy price cap increase, which pushed up housing and household services costs. Gas prices jumped 14.7%, the most since October 2022, while electricity rose 3.6%. Furniture, household goods and clothing and footwear prices rebounded from June’s declines, and inflation strengthened for alcohol, and tobacco as well as health. However, lower motor fuel prices slowed transport inflation, while food inflation fell from 1.7% to a near two-year low of 1.3%.
Core inflation, excluding food, energy, alcohol and tobacco, held at 2.6% for a third month, slightly above the 2.5% forecast. Services inflation, a key Bank of England measure of domestic price pressures, slowed as expected from 3.6% to 3.4%. Core goods inflation rose from 1.7% to 2.2%.
US
Economic Growth
The second estimate confirmed annualised US growth of 1.5% in Q2, matching the preliminary reading but below Q1’s 2.1%. Consumer spending, which accounts for over two-thirds of economic activity, jumped 3.4%, above the preliminary 3.2% estimate and the strongest increase since Q3 2025. Fixed investment grew 7%, driven by spending on equipment and intellectual property amid robust AI demand. Residential investment rose after five quarters of contraction, while government spending declined. Net trade also weighed on growth as imports outpaced exports.
Inflation
US consumer prices edged up 0.1% in July, matching expectations after June’s 0.4% fall, the first decline in six years. Shelter costs rose 0.1%, accounting for about two-thirds of the increase, as a 3.3% drop in hotel and motel prices offset a 0.3% rise in owners’ equivalent rent. Gasoline prices fell 2.9% after June’s 9.7% decline, while food inflation slowed from 0.2% to 0.1%. Annual CPI eased from 3.5% to 3.4%.
Core CPI, excluding food and energy, rose 0.2% in July after being unchanged in June. It was supported by a 0.4% rebound in healthcare prices and a 2.2% rise in airfares. Prices also increased for technology goods, including Apple products, and used vehicles. Core goods prices rose 0.2% after two months of declines, while services excluding shelter also increased 0.2%. Annual core CPI slowed from 2.6% to 2.5%.
Europe
Economic Growth
Eurostat’s second estimate showed Eurozone growth of 0.4% quarter-on-quarter in Q2, matching the flash estimate and up from zero growth in Q1. This was the strongest expansion since Q1 2025, supported by AI-related investment, government spending and one-off factors that offset higher energy prices and the Middle East conflict. Spain led the major economies with 0.7% growth, followed by the Netherlands at 0.4%; Germany, France and Italy each grew 0.2%. Annual growth was 1%, matching the preliminary estimate and up from 0.5% in Q1.
Inflation
Eurozone inflation rose from 2.8% in June to 2.9% in July, as expected, driven by energy inflation rising from 8.5% to 10.3%. Non-energy industrial goods inflation increased from 0.7% to 0.9%, while food, alcohol and tobacco inflation fell from 1.5% to 1.2%. Services inflation edged up from 3.2% to 3.3%. Core inflation, excluding energy, food, alcohol and tobacco, rose from 2.4% to 2.5%.
Asia and Emerging Markets
Japan
A preliminary reading showed Japan’s economy grew at 1.1% annualised in Q2, below the 2% forecast and Q1’s 1.9%. Private consumption, which accounts for over half of economic output, was flat against a forecast 0.5% rise, while government spending increased amid major support measures. Capital spending fell 1.2% rather than rising 0.4% as forecast. Net trade contributed positively as exports rose and imports fell, likely reflecting disruption to Middle Eastern crude oil shipments. Quarter-on-quarter growth was 0.3%, below the expected 0.5%.
Market Overview
CR = Capital return; LC = Local currency
Source: Lipper for Investment Management
Past performance is not a reliable indicator of future performance
There was mixed performance from UK equities, with the FTSE 100 recording a small loss but the mid cap FTSE 250 produced a strong gain. Rising bond yields were headwind and whilst oil prices rose, sterling strength weighed on the performance of the large energy in the FTSE 100. In addition, several other large FTSE 100 stocks, including tobacco companies, Tesco, NatWest Group and HSBC suffered weakness in their share prices. However, the more domestically-focussed FTSE 250 benefited from a strong rally in a broad range of constituents, as well as more positive UK economic data.
US equities, as shown by the S&P 500, rose in August, supported by robust corporate earnings update and strong performance from companies positioned to benefit from AI-related spending and digital infrastructure investment. The energy sector also rosem, benefiting from higher oil prices amid ongoing tensions in the Middle East. European markets, as demonstrated by the FTSE World Europe ex UK Index, ended August with a small gain, with information technology, communication services and financials sectors among the strongest performers. The Japanese Nikkei 225 Index recorded a decent gain, with better than expected earnings reports supportive as was AI-related stock performance.
Asian markets rose, as shown by the gain in the MSCI Asia ex Japan Index. Regional market returns were supported by ongoing investment in technology infrastructure and improving export trends in several markets, notably those benefiting from continued demand for semiconductors and electronic components related to AI development. In particular, Taiwan and South Korea performed well, whilst China and India were among the the underperformers. Emerging markets similarly rose, as shown by the gain in the broad MSCI Emerging Markets Index.
UK government bonds (FTSE Actuaries UK Conventional Gilts Index) saw a small decline, as sentiment considered interest rate increases from the Bank of England, whilst investors were also wary over potential cost-of-living initiatives from the new Prime Minister Andy Burnham, particularly if they undermined fiscal discipline. It was a similar picture in the US and Europe, where long duration costs in particular remained under pressure. Sterling investment-grade bonds also posted a small fall.
This update is intended to be for information only and should not be taken as financial advice.
CA13708 Exp 09/2027
