US inflation surprised on the downside, tempering rate-hike expectations, whilst the renewal of hostilities in the Middle East sent oil prices surging.
Global equities declined, led by a sharp sell-off in semiconductors after a new Chinese artificial intelligence (AI) model revived questions about the returns on AI infrastructure spending, prompting a rotation into value and defensive sectors. Bond yields and the US dollar were little changed over the week. Attention now turns to the European Central Bank (ECB) meeting, flash PMIs and a heavy week of US earnings publications, starting with Alphabet.
Macroeconomics
In the US, inflation surprised on the downside, with the Consumer Price Index (CPI) down 0.4% m/m and the yearly trend easing from 4.2% to 3.5%, driven by a 5.7% m/m drop in energy. Core inflation was flat over the month and decreased from 2.9% to 2.6% y/y. The Producer Price Index (PPI) also declined by 0.3% m/m, with the yearly trend decreasing from 5.5% to 5.0%. Business sentiment (NFIB, New York Empire and Philadelphia Fed) beat expectations on stronger orders and outlook. Retail sales rose 0.2% m/m, with the previous month being revised up to 1.0% thanks to robust auto sales. Consumer confidence improved, with the preliminary University of Michigan index rebounding strongly on better economic and financial outlooks, lower petrol prices, and stable financial conditions; 12-month inflation expectations declined in parallel. Some weakness persisted in housing, with softer National Association of Home Builders (NAHB) sentiment, pending home sales and mixed single-family starts. US industrial production was uneven, with sectoral divergences.
In the eurozone, June headline inflation fell to 2.8% y/y from 3.2% as energy prices eased, and core inflation slipped to 2.4% from 2.6%. Industrial activity remained mixed, with industrial production for May down 0.2% m/m led by consumer durables and intermediate goods. In the UK, the monthly gross domestic product proxy (GDP) rose 0.1% m/m thanks to services, but the backdrop continued to be fragile, as May industrial production fell 0.5% m/m. In China, Q2 GDP slowed to 4.3% y/y from 5.0% on weak domestic demand and a prolonged property downturn; retail sales grew 1.0% y/y and fixed asset investments fell 5.7% y/y, partly offset by resilient manufacturing and exports tied to AI and clean energy.
Looking ahead, flash purchasing managers’ indices (PMI) in developed markets are due next week: manufacturing is expected to remain above 50, while services should improve, but are likely stay just below 50. Prices paid will be watched closely amid elevated levels and renewed oil and shipping risks. In the UK, June inflation should edge down on energy prices to 2.7% y/y amid moderate services inflation, supporting a Bank of England (BoE) wait-and-see stance and it keeping its rates on hold this year. The UK labour market should continue to deteriorate gradually, and wage growth should moderate further; June retail sales are also due.
Several central banks will meet (the ECB, Hungary, Indonesia, South Africa, Türkiye, and Russia). The ECB is expected to leave its rates on hold and maintain a meeting-by-meeting approach, while leaving the door open to a possible September hike given pressure from oil and gas prices; it will also release its quarterly eurozone bank lending survey.
Equities
Global equities registered losses last week (MSCI ACWI total return -1.6%), led by the global technology sector (-4.7%), as a sell-off in the semiconductor subsector (-8.1%) deepened.
Investors rotated into value and defensive areas of the market (energy +4.5%, real estate +1.9%, consumer staples +1.6%) as they digested several crosscurrents: escalating tensions in the Middle East, which sent oil prices surging (Brent crude +15.9% to USD 88/barrel); softer-than-expected US inflation figures, which tempered rate-hike expectations; and solid Q2 reporting from major US banks as well as the semiconductor names ASML and TSMC. Notably, breadth improved beneath the headline indices, suggesting rotation within the market rather than broad de-risking.
Despite the earnings beats, chipmakers entered bear-market territory, with a key industry gauge, the Philadelphia Semiconductor Index (SOX), declining 20.3% from its June high. Year-to-date returns for the SOX nonetheless remain exceptional at +65.3%, compared with +10.4% for global equities. Concerns regarding artificial intelligence (AI) infrastructure spending were exacerbated by a surprise breakthrough from Chinese AI start-up Moonshot, which unveiled an open-weight AI model (Kimi K3) that it says rivals models from American heavyweights OpenAI and Anthropic – claims that will remain untested until the model weights are released later this month.
The arrival of a cheaper Chinese model, similar to that of DeepSeek last year, raises questions about the returns on heavy infrastructure spending, potentially shifting investor conversations from who benefits from AI spending to who earns an attractive return on it – a question that places capital expenditure commentary from the major hyperscalers firmly in the spotlight as Q2 results are published in the coming weeks, starting with Alphabet this week and Amazon, Meta and Microsoft next week.
As at Friday, 10% of S&P 500 constituents had reported results, with 88% beating estimates, and earnings per share (EPS) growth estimates for the quarter already moving higher: +24.7% vs. +23.2% expected at end-June. In the week ahead, markets will be looking to commentaries from the 86 US benchmark constituents (17% of the total) that are publishing results for clues on the health of the US economy and corporate earnings – fundamentals we continue to view as more durable drivers of market direction.
Investor conversations may shift from who benefits from AI spending to who earns an attractive return on it
Fixed income
Global fixed income was broadly flat last week, with investment grade and high yield indices rising by roughly 0.1%, while AT1s were little changed, despite renewed Middle East tensions and reports of expanded US strikes on Iranian-linked targets.
Meanwhile, yields on US 10-year Treasuries barely moved during the week, staying in a relatively narrow range of 4.5–4.6%. On Wednesday, Fed Chair Kevin Warsh said he was unhappy with the current level of inflation and was determined to bring it down, however, he did not explain how he plans to do so. At the same time, some of his Fed colleagues, such as Lisa Cook, are already saying that they see risks of higher inflation stemming from the AI investment boom, tariffs, and the conflict in the Middle East, and that they should be ready to act on rates if they do not see signs of disinflation soon.
In Europe, the ECB is scheduled to meet this week, and most economists agree that it will keep rates on hold, taking more time to assess the impact of current Middle East tensions and recent oil price volatility on the economy and inflation.
In the UK, further work on regulating the British government bond repo market is under discussion due to the ongoing risks posed by a potential drying up of liquidity during stress episodes, as was seen in 2020 during Covid or in 2022 after Liz Truss’s mini-budget, both situations where the BoE had to intervene to stabilise the situation.
The US 10-year Treasury yield barely moved, holding in a narrow 4.5–4.6% range despite renewed Middle East tensions
Forex & Commodities
Last week, the US dollar continued to trade in a tight range against the majority of G10 currencies. US CPI data printed slightly below expectations, giving no reason for US front-end yields to rise. Investors reduced aggregate long USD futures positioning to levels of just below USD 40 billion. There are few US data releases over the coming week, with the publication of PMI data towards the end of the week being the main event. Overall, we anticipate that the USD should trade within recent ranges, given the absence of catalysts for directional moves.
The ECB’s meeting on Thursday is the main event for the euro. Investors anticipate that rates will remain on hold at 2.25%. ECB speakers have given a mixed view on the necessity of further rate hikes, giving no reason for another deposit rate hike at this week’s meeting. The EUR/USD should trade within recent ranges, barring any surprises from Friday’s PMI data release.
The main events for sterling are the publication of June CPI data and labour market data. Inflation data should inform BoE rate expectations, with markets having priced in just over one 25-bp rate hike in the coming year. Unemployment data are unlikely to show any material improvement, giving no reason for markets to reduce short GBP positioning. The GBP/USD should struggle to rise above 1.34 on a sustained basis.
Gold traded lower to levels of just above USD 4,000 per oz, reflecting the renewal of hostilities in the Middle East. Once again, downside risks should reflect the duration and intensity of the conflict. We see only modest downside risks, as lower prices should tempt both central bank and retail-focused ETF purchases.
With no catalysts for directional moves, the USD should continue to trade within recent ranges
The opinions expressed herein are correct as at 20 July 2026 and are subject to change without notice. This information should not be relied upon by the reader as research or investment advice regarding any particular fund, strategy or security. Past performance is not a guide to current or future results. Any forecast, projection or target, where provided, is indicative only and is not guaranteed in any way.
