US inflation continues to fall

Key takeaways

Global stock market indices made modest progress. UK shares and government bonds were among the worst performers, despite the improving economic backdrop.

US inflation on a downward trajectory
Last week, US CPI (Consumer Price Index) inflation declined to 3.4% in July, from 3.5% in June. It hit 4.2% in May thanks to rampant gasoline prices. Meanwhile, core inflation, which strips out volatile food and energy costs, eased from 2.6% to 2.5%. Elsewhere, US PPI (Producer Price Index) inflation also came in lower than forecast, at just 4.7%. Alongside July’s unexpectedly lacklustre US jobs report, and weaker retail sales figures, the news hardened expectations of a rate hold by the Federal Reserve next month, and helped to pare back expectations of further US rate hikes in 2026.

This helped the S&P 500 Index of US companies to hit another record high on Thursday. Even so, US 30-year mortgage rates are the highest they’ve been in over a year reflecting the impact of the Iran conflict on bond and housing markets.

UK economy boosted by World Cup spending
The UK economy grew by 0.4% in the second quarter, suggesting that British businesses are weathering the potential threat of soaring energy prices. The figure was broadly in line with forecasts and owed much to a bumper June, which saw 0.3% growth thanks mostly to the World Cup. The Office of National Statistics noted that the early weeks of the World Cup boosted activity for restaurants, alcohol and television producers while England’s extended run in the competition, and the ‘feel good’ factor it delivered, helped to sustain the boost in hospitality spending. Economists were quick to point out the short-lived nature of the “seasonal quirks” at play.

Meanwhile, the Bank of England warned inflation could rise to 3.2% by the year end with Treasury figures now suggesting that the Strait of Hormuz crisis could reduce UK GDP growth to just 0.3% in 2027 if it isn’t resolved.

Europe’s quiet earnings story
Although the record numbers from the latest US earnings season have stolen the headlines, stock markets in Europe are also heading for their best earnings season since 2022. The STOXX Europe 600 Index, which tracks 600 large, medium, and small companies across 17 European countries, is now on course to report aggregate earnings growth of 23.4%, according to the latest data.

Second-quarter profit expectations for Europe’s blue-chip companies have risen for eight consecutive weeks thanks to soaring energy and materials sector profits. The former are expected to see their annual profits more than double, while basic materials stocks are thought to be the second-fastest growing sector. Absent energy stocks, earnings growth for STOXX 600 companies is forecast to be a more modest 12.3%.

For more in-depth commentary from our investment team, please see our latest Investment Views article and Quarterly Outlook video.

Market moves

• Global shares made modest progress. While UK and European shares declined, US shares were flat.
• Emerging market and Japanese shares outperformed those of western markets with strong gains.
• Both UK and US government bonds suffered losses leaving them in negative territory for the year. Meanwhile, gold added 0.8%.

What to look out for this week

• Today brings GDP numbers for Japan and US manufacturing data.

• Tuesday promises UK unemployment and European economic sentiment numbers alongside US industrial and manufacturing data.

• The latest UK (RPI) and PPI (or ‘factory gate’) inflation numbers are due Wednesday, alongside European inflation data.

• Friday brings Japan’s latest inflation reading alongside a slew of PMI (purchasing managers index) data for Australia, Japan, India, the US, Europe and the UK.

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