Weekly Market Recap

U.S. data gave markets something close to a Goldilocks combination last week. U.S. inflation cooled following weaker jobs data, but there is still little evidence of a broader downturn.

The July headline Consumer Price Index (CPI) rose just 0.1% over the month, taking annual inflation down to 3.4% from 3.5%. More importantly, core inflation rose 0.2%, with the annual rate easing to 2.5%. This was reassuring after surging oil prices raised fears that inflation could reaccelerate.

There were some yellow flags beneath the surface. Core goods prices accelerated and services inflation also remains sticky.

But producer prices provided relief. The headline Producer Price Index (PPI) was unchanged in July, contradicting expectations for an increase, while the annual rate slowed to 4.7% from 5.5%. This suggests the pipeline inflation pressure is weaker than feared.

Taken together, CPI and PPI have reduced the urgency for the Federal Reserve (the Fed) to immediately raise interest rates again. This comes after last week’s surprisingly weak jobs report, which showed the U.S. economy lost 23,000 jobs in July. Retail sales also contracted in July, which provided another important test of consumer momentum.

Interestingly, markets currently seem comfortable with a little weakness in U.S. data as investors still see resilience rather than recession. That distinction is important. The broader economy remains resilient and crucially, corporate profits are exceptionally strong.

Some moderation in employment and consumer spending can be helpful for markets if it takes pressure off the Fed.

Markets sharply reduced the probability of a September rate hike following the inflation data, although an increase later this year remains possible. For equities, that is a relatively favourable combination: growth is cooling enough to give the Fed room to wait, but not enough to derail corporate profits.

However, oil continues to be the obvious challenge to this Goldilocks scenario.

Markets learn to live with Hormuz

Developments surrounding the Strait of Hormuz remain one of the biggest macro risks facing markets given the unprecedented supply shock, but investors have become noticeably less reactive to each new headline.

The conflict remains unresolved and the Strait continues to face severe disruption. The U.S. has intensified its threats towards Iran, while Washington is preparing what Treasury Secretary Scott Bessent has described as “unprecedented additional economic measures” against Tehran.

President Donald Trump has alternated between a more conciliatory tone and renewed threats of pressure, creating occasional flare-ups in oil prices. Brent crude oil has nevertheless remained around the high-USD80s per barrel, well below its earlier wartime peaks.

A renewed surge in oil would of course be a concern. It could push inflation higher again and potentially force the Fed back towards tightening.

Despite this uncertainty, the S&P 500 reached record highs.

There is an element of geopolitical fatigue here. After months of U.S.-Iran tensions, markets are becoming more immune to individual headlines. Unless an escalation materially changes the outlook for energy supply, inflation or economic growth, investors appear increasingly willing to look through it.

Ultimately, fundamentals matter more. And right now, those fundamentals remain supportive.

Earnings give the bull market firmer foundations

The second-quarter U.S. earnings season has been extraordinary.

With almost 90% of the S&P 500 having reported by the end of last week, blended earnings growth stood at 50.4% year-on-year. That headline earnings growth number is inflated by hyperscalers’ investment gains from SpaceX, Anthropic and Open AI.

Adjusting for those exceptional items that are not related to underlying business operations, S&P 500 earnings growth was still around 32%. The strength of corporate America is not simply an accounting effect or an AI story.

At the same time, we are seeing more evidence that enormous investment in AI is translating into revenue and profit. Cloud demand specifically tied to AI has boomed, semiconductor earnings have surged and AI-related infrastructure spending continues to feed through the broader economy.

Perhaps even more encouraging is the broadening of the rally. Technology remains a major earnings engine, but profit growth is becoming less concentrated. That gives the bull market a healthier foundation than one driven purely by a handful of mega-cap stocks and rising valuations.

There are still risks. Expectations for AI are extremely high, valuations leave less room for disappointment, capital expenditure continues to rise rapidly, and free cash flow from hyperscalers have deteriorated.

But for now, the combination of strong earnings, improving AI monetisation and broader participation in profit growth gives investors a fundamental reason to remain constructive. That also explains why markets have been able to absorb softer economic data and persistent geopolitical uncertainty. The macro backdrop may be cooling, but corporate America is not.

What’s coming up?

Fed minutes:

Minutes from the Fed’s July meeting are released on Wednesday. Markets will be looking for clues on what would trigger a hike later this year.

UK inflation and jobs:

UK July CPI and labour market data will be due, giving a fresh perspective for the Bank of England on whether it is sensible to be on hold.

Global Purchasing Managers indices:

These timely private surveys will help investors assess whether recent softer labour market data represents healthy cooling or something more concerning.

Markets opened the week by responding to reports of a possible de-escalation in the Persian Gulf.

Oil fell from a July high of USD100 per barrel to below USD80 per barrel, a striking move given the collapse of the previous U.S.-Iran ceasefire. A new agreement to reopen the Strait of Hormuz appears to be in preparation, which would entail inbound shipping via Iran, outbound shipping via Oman, both sides clearing mines and no tolls charged. President Donald Trump sounded constructive, while retaining the threat of military action.

Since the onset of the conflict, crude prices have remained lower than analysts would have expected given the scale of supply disruption, and they have tended to fall on any sign of de-escalation. Barriers to a full reopening of the Strait remain high, with Iran appearing to have demonstrated that it can wield influence over the waterway at will.

For portfolios, the practical implication is familiar: energy prices feed through to inflation, central bank thinking, and the cost of everything from a refinery run to an airline ticket. It’s best to avoid getting whipsawed by headlines that change by the day.

AI stocks and shifting sentiment

Alongside the Gulf, AI remained the dominant concern for equity markets.

July saw a sharp rotation out of the AI spending beneficiaries, the companies that sell the equipment used by the AI ecosystem. Bottlenecks in the supply of specific components, most notably high-bandwidth memory (a specialist chip used in AI servers), drove a substantial rally from March to June while July brought a sharp reversal.

The sell-off reflected several factors. Open-weight models (AI systems whose underlying code is publicly available) have been making significant advances in efficiency, suggesting that less server capacity may be required to run them.

Hyperscalers, the large cloud providers driving the bulk of investment, have also depleted their free cashflow and may face funding constraints. A significant factor, however, appears to have been a single hedge fund forced to unwind well-known leveraged positions; once the situation resolved, the stocks rallied, though some nervousness persists.

SpaceX captured the market’s conflicting mood. Results beat on earnings and revenue but were overshadowed by a sharp rise in AI-related capital spending. The stock fell 7% after hours (having gained 9% during the previous session).

Real economy signals a mixed picture

The week brought a range of U.S. jobs data, with stability the best overall description. There was little change in job openings, resignations and layoffs, and jobless claims nearly reached an all-time low.

Purchasing managers’ surveys (which track activity across manufacturing and services) showed employment increasing modestly alongside a broad improvement in economic activity across regions and sectors.

It’s notable that the U.S. no longer stands out as the sole beacon of growth. European economic surprises have exceeded those of the U.S. recently, and the stock market is no longer being driven by a narrow group of AI-related stocks, having seen much broader participation recently.

The synchronicity of that improvement should be enough to shift the window of anxiety from growth towards inflation.

However, at a time when numerous sources seem to be showing an improving employment picture, the July employment report from the Bureau of Labor Statistics showed a surprise decline of 23,000 jobs. This fell far short of forecasts, which had predicted an increase of up to 80,000 new jobs. Wage and pay growth also slowed.

This may confuse the outlook for the U.S. jobs market, but it should be reassuring for investors, as many have been concerned about the potential need for interest rates to rise. An increase in September was hanging in the balance, but this seems a bit less likely now.

What is coming up?

U.S. July inflation:

The inflation rate will be a key political and economic gauge ahead of November’s U.S. mid-term elections, with direct implications for the Federal Reserve’s rate path.

UK Q2 GDP (first estimate):

The new Prime Minister Andy Burnham will be watching GDP data closely as he prepares for his first budget on 28 October.

Retail sales:

Oil’s retreat has improved business confidence, but the question is whether U.S. and UK consumers have returned to the high street.

Last week saw global equities move higher overall, but beneath the surface markets became more selective. While the S&P 500 gained, leadership shifted as investors reassessed which companies are genuinely benefiting from the AI boom. 

The bond markets were also in focus, with the US 30-year Treasury yield reaching its highest level since 2007 after the Federal Reserve kept rates unchanged and offered little guidance on the path ahead. Meanwhile, easing concerns over an immediate escalation in the Middle East helped Brent crude fall almost 7% over the week, providing some relief for inflation expectations.

The AI story evolves

The week's earnings season reinforced that investors are no longer rewarding companies simply for participating in the AI theme. Microsoft surged up 21.8% over the week after reporting stronger-than-expected cloud growth and demonstrating clear commercial benefits from its AI investments. 

Amazon also impressed, supported by accelerating growth at AWS and increased capital expenditure plans. By contrast, weaker guidance from Apple and softer expectations around future growth from Meta were met with a much cooler reception. 

The semiconductor sector, often viewed as a key beneficiary of AI spending, struggled overall despite a sharp late-week rebound. The message from markets appears clear: investors are increasingly demanding evidence that spending is translating into revenues and profits.

Central banks and geopolitics remain in focus

Alongside earnings, investors continued to navigate an uncertain macroeconomic backdrop. The Federal Reserve left interest rates unchanged, while markets interpreted the Bank of England's decision and accompanying commentary as less hawkish than feared, helping support UK government bonds. Geopolitics also remained a major influence. 

Early in the last week, renewed tensions between the US and Iran pushed oil prices sharply higher, only for those moves to reverse as hopes of renewed diplomacy emerged. 

By the end of the week, optimism surrounding fresh US-Iran negotiations and a reduced likelihood of near-term military escalation helped push oil prices lower and supported risk sentiment more broadly.

What is coming up?

Attention now shifts to the US labour market, with a series of employment reports culminating in Friday's non-farm payrolls release. 

Recent market movements suggest investors are becoming increasingly sensitive to signs that economic growth may be slowing as higher interest rate expectations continue to work through the economy.

At the same time, equity valuations remain demanding and bond yields are near multi-year highs, leaving little room for disappointment.

Against that backdrop, the key question for markets is whether incoming data justify the market's relatively constructive growth outlook against a backdrop of higher bond yields and still-elevated geopolitical uncertainty.

Markets were dominated by two powerful themes last week: geopolitics and AI capital expenditure (capex). Escalating tensions in the Middle East pushed oil prices higher, renewing concerns over inflation and driving a repricing of interest rate expectations. 

Meanwhile, corporate earnings provided further evidence that the AI investment cycle remains firmly intact, although the enormous scale of spending is prompting greater scrutiny over future returns.

Geopolitical tensions intensified as the conflict broadened beyond Iran and the Strait of Hormuz. Risks increasingly extended into the Red Sea, where Houthi militants in Yemen targeted Saudi-linked oil tankers, raising concerns that disruption could spread across multiple critical energy and shipping routes. 

This helped push Brent crude oil to above USD100 per barrel as markets priced in a greater risk to global energy supplies. The renewed surge in oil comes just as recent inflation data had started to show some improvement. 

Headline inflation in developed economies eased in June, helped in part by lower energy prices. With oil prices now rebounding sharply, that disinflationary tailwind is likely to fade and could potentially reverse if higher prices persist.

President Donald Trump announced a new round of tariffs covering dozens of U.S. trading partners, with duties broadly ranging between 10% and 12.5%. Markets largely took the announcement in their stride; the measures are essentially a continuation and restructuring of existing tariffs under a new legal framework rather than a significant new escalation in the overall tariff burden.

Nevertheless, tariffs remain another potential source of price pressure alongside higher energy costs, adding further uncertainty to the inflation outlook at a time when inflation remains above central bank targets in many developed economies.

Bond yields rise as rate expectations turn more hawkish

Government bond yields rose across developed economies as investors reassessed how central banks may respond if higher energy prices lead to more persistent inflation. The shift in rate expectations has been significant.

In the U.S., markets are pricing in roughly a one-third chance of a Federal Reserve rate hike at its July meeting, with almost two quarter-point increases priced by year end. In Europe, the European Central Bank kept interest rates unchanged at its July meeting, but markets are increasingly pricing in the possibility of a rate increase as soon as September. 

The repricing has also been pronounced in the UK, where markets are now pricing in almost two rate hikes by year end.

For central banks, much will depend on whether the energy shock produces only a temporary increase in headline inflation or generates more persistent second-round effects. Policymakers will therefore be watching closely for signs that higher energy costs are feeding into broader prices and inflation expectations.

AI spending accelerates, but so does scrutiny

While geopolitics and inflation dominated the macroeconomic backdrop, AI remained the other major force driving markets last week. Alphabet provided perhaps the clearest illustration of both the extraordinary scale of the AI investment boom and the growing debate around its returns.

The Google parent raised its expected capex for this year to between USD195 billion and USD205 billion, as it accelerates investment into AI computing capacity and cloud infrastructure. That spending comes at a significant cost; Alphabet recorded its first ever quarterly negative free cash flow of USD5.9 billion since going public approximately two decades ago.

However, there are increasingly clear signs that rapid AI development is translating into growth. Google Cloud revenue surged 82% year-on-year, making it one of Alphabet’s fastest-growing businesses, supported by strong demand for AI infrastructure and solutions. Intel reinforced the message, with data centre sales rising 59%, benefitting from continued investment in AI and computing infrastructure.

The investment case for AI therefore remains intact. However, as capex reaches extraordinary levels, investors are increasingly scrutinising whether hyperscalers, the largest cloud and technology operators can generate sufficient revenue, profits and cashflow to justify that spending.

The earnings season is gathering pace, with updates from major technology companies likely to shape sentiment around the AI investment cycle.

UK activity rebounds thanks to football and weather

Amid the geopolitical uncertainty, there was some positive signals from the UK economy. UK inflation slowed to 2.6% in June below expectations and the lowest level in more than a year. Lower energy prices contributed to the improvement, although the subsequent rebound in oil means this favourable effect may prove temporary.

Economic activity also provided a positive surprise. The latest flash purchasing managers’ indices (PMIs) showed the composite index rising from 49.3 in June to 52.1 in July, moving back above the 50 level that separates expansion from contraction. Services activity rebounded, helped partly by stronger hospitality activity around the World Cup and warm summer weather, while manufacturing also improved.

Taken together, softer inflation and stronger activity provide some welcome evidence that the UK economy has regained momentum. However, some caution is warranted; part of the improvement may reflect temporary factors, and higher oil prices could raise costs for businesses and squeeze household purchasing power.

It remains to be seen whether the improvement can be sustained.

What is coming up?

The Federal Reserve and Bank of England: 

Monetary policy will be in focus as policymakers balance renewed inflation risks from higher oil prices against the growth outlook.

Microsoft, Meta, Apple and Amazon earnings: 

Big Tech results will put the AI investment debate back in focus, with particular attention on capex plans.

Oil and the Middle East: 

Developments around the Strait of Hormuz and the broader conflict remain a key risk for markets.

The standoff in the Gulf set the tone from last Monday’s (13 July) open and never fully released its grip. The Strait of Hormuz remains a live question, with the Joint Maritime Information Centre reporting the southern route technically open but the threat level severe, and vessels warned of mines.

Meanwhile, Iran’s Revolutionary Guard, said it would let no ship pass until foreign interference ended. Traffic appeared to halt almost entirely, though some clients close to the market suggested ships were still moving with their transponders switched off.

Last Tuesday, President Donald Trump floated a plan to charge a 20% toll on cargo transiting the Strait and to reinstate a U.S. naval blockade. The plan lacked any credible route to implementation, and by Wednesday it had quietly been dropped.

Overall, Brent crude oil prices jumped by more than 13% in a week to over $86 per barrel.

The near-term worry runs deeper than crude itself. More than 10% of global refining capacity remains offline following Russia’s export ban and repeated Ukrainian strikes on its refineries. With inventories of refined products low, that bottleneck has pushed petrol, diesel and jet fuel higher, gasoline rose around 6% at one point. 

These all feed directly into inflation expectations. Longer-dated oil futures still point to a supply glut later this year, so the market’s discomfort is about timing, not a permanent shift.

On a positive note, the latest U.S. inflation report offered some reprieve. Headline Consumer Price Index (CPI) inflation contracted 0.4% in June, driven by energy prices. Core CPI was flat on the month, the biggest downside surprise since mid-2022.

Core services excluding shelter inflation fell sharply, shelter inflation decelerated and even the tech-related categories showed deepening deflation. The odds of a July hike evaporated. But this is a pause, not an all-clear; with a tight labour market, booming AI investment, loose financial conditions and rising oil again, we still think a rate rise is likely at one of the year’s final three meetings.

The Federal Reserve (the Fed) Chair, Kevin Warsh, told Congress the Fed has “no tolerance” for persistently elevated inflation, while adding it’s in no rush.

Semiconductor stocks stumble despite strong AI fundamentals

Ironically, the sell-off came despite another week of encouraging news for the AI investment cycle.

Both TSMC and ASML delivered strong results and maintained constructive outlooks. TSMC continued to benefit from robust demand for advanced AI chips, while ASML, whose lithography machines underpin the world’s most advanced semiconductors, highlighted strong order momentum and confidence in sustained demand.

As two of the industry’s most important bellwethers, their results reinforce the view that AI infrastructure investment remains on a solid footing and that hyperscale spending continues to support the sector.

So, why did semiconductor shares fall? The answer appears to lie more in market positioning than fundamentals.

Following an exceptional rally over the past year, investors took the opportunity to lock in profits as valuations across parts of the sector became increasingly demanding. Technical factors also amplified selling pressure, including leveraged exchange-traded funds (ETFs) in South Korea that accelerated declines in memory chip stocks and increased short-term volatility.

The recent correction therefore appears to reflect sentiment rather than a meaningful change in the outlook for AI. As earnings season gathers pace, guidance from the major technology companies on AI demand, capital expenditure and monetisation will be closely watched.

Economic fundamentals remain supportive

Against the market volatility, the underlying economic picture changed very little.

Recent U.S. economic data continue to suggest that growth is resilient. Initial jobless claims have fallen more than expected in recent weeks, while retail sales indicate that consumer spending continues to hold up.

Corporate earnings have also provided reassurance. Large U.S. banks generally reported solid results, supported by resilient consumer spending, healthy credit quality and improving capital markets activity. 

While management teams remain mindful of geopolitical uncertainty and the interest rate outlook, there was little evidence of meaningful stress among either households or businesses.

Taken together, these indicators suggest the U.S. economy continues to enjoy relatively solid foundations. That should continue to provide support for corporate earnings, even if markets experience periods of heightened volatility.

Attention now turns to earnings season, with updates from the major technology companies likely to shape sentiment around the AI investment cycle. Geopolitical developments in the Middle East will also remain in focus, given their potential implications for oil prices and inflation.

What is coming up?

European Central Bank (ECB) meeting:

The ECB will likely keep its policy rate unchanged at its July meeting, as the deceleration in June CPI removed the urgency.

Strait talking:

The Gulf conflict remains unresolved, with the oil price the key wild card for inflation and bond yields.

Earnings gather pace:

With reporting season now in full swing, expect more from technology and healthcare in the days ahead.

The sense of calm for the Strait of Hormuz had disappeared by the end of last week.

Iran has continued to insist it would impose fees on vessels using the Strait of Hormuz once the 60-day negotiation window with the U.S. closes. In an early act of antagonism, Iran said China and friendly nations would receive special treatment.

On Saturday 4 July, eight ships turned back on the southern Omani route before flows resumed. By Tuesday last week, the mood had darkened sharply: an LNG carrier, the Al Rekayyat, was struck by Iranian projectiles near the Omani coast, with reports of at least one further vessel fired upon. Traffic through the Strait, which was already at a fraction of its pre-March level, looked precarious.

The U.S. responded in force. Last Wednesday, it struck some 80 sites in Iran and revoked a waiver permitting new sales of Iranian oil. Iran called both moves violations of the interim deal and vowed a decisive response. 

The dispute appears to turn on Tehran’s insistence that ships transit only through Iranian waters, a condition that was never obviously part of the agreement reached with Washington. Yet, strikingly, technical talks between the two sides were still reported to be continuing by last week’s end.

Markets took it all with remarkable composure. The oil price rose by around 8% from its lows but lacked any serious momentum. RBC’s Chief Commodity Analyst Helena Croft has stressed since the onset of the crisis that traffic is unlikely to ever fully return to February’s volumes.

Europe has been caught in an economic crossfire between the U.S. and Iran. A bank-led rally followed the onset of peace negotiations but partially reversed as the conflict resumed.

Semiconductor sector restabilises

Last week began with the market focusing its attention on the semiconductor industry, where a bout of volatility had erupted. Semiconductor and related stocks have been the market leaders over recent weeks, rising extremely sharply. 

They have become associated with speculative investment activity, and it was inevitable that, at some stage, the increases would need to consolidate at the very least.

Despite some very supportive earnings news from Samsung, the sector fell as investors took profits, but towards the end of the week, stability seemed to have returned.

Hot summer nights create mixed results for Europe

Against this background, the combination of the historic heatwave across the UK and continental Europe and a North American World Cup broadcast schedule featuring late-night kick-off times will distort typical economic performance for short-term and structural reasons. 

Global workforce data from UKG projects up to a USD17 billion drag on productivity from World Cup sleep deprivation and next-day absenteeism, while over 70% of UK workers report heat-induced capacity drops.

Six of the last eight teams in the World Cup were European, and while some South American countries seem to experience a market impact from World Cup wins, Bloomberg found little evidence of that in European markets.

Hospitality usually gets a boost from the World Cup but less so when games take place outside traditional hours. The sector also benefits from good weather, but the gains fall unevenly, and margins are squeezed by higher energy and labour costs. Data from Tenzo showed uncooled city-centre venues losing footfall, while outdoor and air-conditioned locations thrived.

Certain categories of household expenditure have soared, such as the 320% year-on-year surge in cooling appliance sales in the UK, with household air-conditioning penetration at around 20% across Europe.

The chart measures the Cooling Degree Days index, which shows how much and for how long the outside air temperature rose, or is expected to rise, above a specific baseline temperature.

If these extreme summers persist into a long-term trend, structural risks will intensify.

According to the United Nations, persistent heatwaves transition from seasonal inconveniences into structural drags on growth, with projected multi-billion-dollar gross domestic product (GDP) output losses across France and Germany due to permanent cross-border supply chain friction and road/rail infrastructure degradation.

We expect corporate capital expenditure to shift defensively towards climate adaptation and cooling infrastructure alongside productivity-enhancing innovations.

Prime minister-in-waiting

Andy Burnham looks set to become prime minister around 20 July, while Ed Miliband is considered the most likely candidate for chancellor. With both men positioned to the left of the current leadership, some observers worry about the implications for gilts.

We would caution against overreacting. Politicians often soften in office, and Burnham has already walked back his more combative remarks and committed to the existing fiscal rules. The memory of the Liz Truss episode remains fresh, centrist Labour MPs act as a counterweight and Burnham has ruled out an early election.

Indebtedness is a genuine long-term concern, but the immediate political risk should probably be discounted.

What is coming up?

Q2 in view: Large companies begin reporting their second-quarter earnings this week, with the banks getting things started on Tuesday.

Easy does it: U.S. inflation should decline slightly as new data is released.

Talk the talk: Rachel Reeves is due to deliver the Mansion House speech on Tuesday, in what could be her last major engagement as chancellor, depending upon the whims of Andy Burnham.

The second quarter ended with a pretty good week for stocks, but plenty of drama remains.

Tension remains despite oil prices falling significantly since the likelihood increased that the Strait of Hormuz would reopen. Iran harassed ships taking the southern route, which goes through Omani waters, and the U.S. responded by revoking a waiver on Iranian oil sales and striking 80 targets within Iran.

The two parties reaching an agreement remains challenging. The oil price rose but remains well below its recent peak.

Cracks in the capex story or healthy consolidation?

AI infrastructure has become the modern market bellwether. While questions remain over the efficacy of hyperscaler capital expenditure (capex), there seems to be less controversy about holding the beneficiaries of that capex, the semiconductors and memory chip producers and associated electrical suppliers.

The remaining controversy refers to how long hyperscalers will keep pumping significant, upfront capital investment into their AI infrastructure. The most recent niggle of doubt comes from leaks suggesting Meta could lease computing capacity. That might be welcome as a source of revenue, but when Mark Zuckerberg has discussed it previously, he has described it as a solution if Meta was to overbuild.

The leaks came after xAI agreed to lease computing capacity to Anthropic, and with token costs (the per unit pricing of AI models) having slipped nearly 20% from their May peak, it created some nervousness that the world might already have enough computing capacity, which would obviously imply lower future orders. However, that would seem difficult to square with the lengthening backlogs revealed by other hyperscalers.

While chip stocks have eased back from their peaks, they look more like a healthy consolidation after an outstanding performance than a reversal.

From a technical perspective, market breadth has been picking up. This is encouraging at a time when the market seemed to rally despite a weak economy.

One important aspect is that the resumption of oil flow in the Strait of Hormuz has led to an easing of inflation pressure. Data on U.S. real income and spending growth has shown how higher inflation has been eating into real incomes, causing them to shrink marginally relative to last year.

This means that Americans have reduced their savings to a historically low level. It is not yet unsustainable, and evidence seems to indicate that immediate future spending growth is likely to be maintained. But some relief through lower inflation needs to come for real spending to be maintained.

U.S. jobs growth stalls as AI drives layoffs

The latest U.S. non-farm payrolls report was downbeat, with just 57,000 new jobs created in June. The labour market doesn’t seem strong enough to generate significant wage demands, although a shrinking labour force means that it isn’t too slack either.

The best outcome for the economy would be wage growth without inflation through faster productivity. Is that happening? The fact that the Challenger jobs report cited AI as the most common reason for layoffs throughout 2026 suggests that it might be.

The report only covers a small fraction of the total layoffs in a given month, but if it’s indicative of a broader trend then it would seem to indicate that companies are beginning to make efficiency savings through AI.

Germany accepts pensions reform package

Pension spending is a growing fiscal challenge across the Eurozone, and it’s set to rise by around 1% of GDP by 2035 as populations age.

Germany faces a particular challenge: its working-age population is falling faster than that of most peers, yet its pension system is almost entirely pay-as-you-go and unfunded. Its retirement assets equate to less than 15% of GDP, compared to around 80% in the UK and 150% in the U.S., according to Capital Economics.

The Merz government initially made things worse by extending the suspension of Germany’s sustainability factor until 2031 and expanding mothers’ pension entitlements. The ‘sustainability factor’ refers to a mechanism within Germany’s pension system that limits the pension level if there are more retirees than active workers paying in. The moves are estimated by Capital Economics to add 0.4% of GDP to pension spending by 2035.

However, this week, Merz’s coalition government accepted a reform package from an independent commission that improves things. Its two most significant recommendations are a six-month increase in the state pension age and the creation of a compulsory Defined Contribution (DC) scheme (modelled on Sweden’s premium pension system).

This is expected to channel around 30 billion euros per year into capital markets including equities, venture capital and private equity.

It will take decades to realise the benefits. But the long-run implications are significant: the DC scheme could structurally increase institutional demand for European equities and create new flows for asset managers and private equity. It’ll build up slowly, but the concept seems sound.

Andy Burnham’s Labour leadership speech

Reform was also in the air during Andy Burnham’s speech last week, which established his intention to succeed Sir Keir Starmer as Prime Minister.

This would have been a bigger deal a few weeks ago but Burnham’s critical conversion to backing existing fiscal rules, abandoning his previous scepticism of bond market constraints has been the primary source of market reassurance.

With fiscal policy constrained, the attention has shifted to reforms that may come with immaterial costs, such as devolution. It’s true that the UK has become more centralised over the past 20 years. What is less clear is whether devolution will improve growth.

Research suggests that the critical form of devolution that would improve performance would be the devolution of revenue raising, rather than simply spending larger grants from central government.

Procurement reform is the most immediate corporate sector implication. Burnham explicitly commits to ending “chasing cut-price deals around the world” and applying social value weighting to all eligible public contracts, including defence. This is a material positive for UK-based manufacturers and suppliers in steel, defence and energy and food, and a risk for international incumbents.

Utilities are a clear watch item. The commitment to greater public control of water, energy and transport, modelled on Greater Manchester’s bus franchising, is a directional warning for private operators of listed infrastructure assets. Having seemingly accepted that they can’t be brought into public ownership, stricter regulation seems more likely.

Housing and construction represent the most concrete fiscal and sectoral opportunity. A large-scale council house building programme using public land, framed explicitly as a fix for what Burnham calls the “ruinous impact” of the housing crisis on public finances, would be a significant positive for the construction sector. However, house building has been promised by previous governments and not delivered.

The most positive thing from the UK perspective has been the lack of a negative reaction from the gilt market.

We expect that Burnham will feel constrained from radical policy by the fact that the mandate he is inheriting was won based upon Starmer’s manifesto. He will need a significant bounce in the polls to be tempted to seek a mandate of his own. But the biggest single constraint on governments is the bond market’s reaction to any policies, which he’s managed to tame for now.