July’s softer inflation leaves a September US Federal Reserve (Fed) rate hold as the most probable scenario.

Equities advanced on AI-led momentum and solid earnings. US rates saw a twist steepening as the odds of a rate hike were priced down. The US dollar edged lower following data publications. Gold rose on softer front-end yields.

Macroeconomics

Those who expected the US July inflation print to shift the Federal Open Market Committee (FOMC) voting pattern have been disappointed; if anything, last week’s data reinforced the case for the Fed keeping rates on hold in September.

Consumer price pressures eased a touch in July but delivered no surprises. Headline Consumer Price Index (CPI) inflation slid slightly to 3.4% from 3.5%, helped by a second monthly drop in energy prices; core CPI, which strips out energy, slipped to 2.5% from 2.6%, while the stickier components sent mixed signals. Core services, the tranche that worries policymakers the most, re-accelerated on firmer medical care and transportation costs, keeping the ‘last mile’ of disinflation on rocky ground. Housing, which is still the single largest contributor to the basket, continued to post weak growth rates and its more subdued pace is precisely why the headline figure has room to keep easing, which should give the Fed cover to keep rates on hold through to year-end.

US consumers reined in spending (-0.6%) at online stores and auto dealers in July, as a softer labour market, the fading lift from the World Cup, and the waning effect of one-off tax refunds all took their toll. That said, initial jobless claims held at low levels, evidence that July’s weak payroll report has so far not marked the start of a broader deterioration in the labour market. Moreover, receipts at restaurants and bars – the report’s only services category – rose 0.5%, suggesting that household demand remains solid.

The UK proved more resilient than its peers: its economy weathered the oil shock, with June’s gross domestic product (GDP) figure rising 0.3% against expectations of a slight contraction, pushing second-quarter growth to 0.4%. The details show that the acceleration was driven by artificial intelligence-related (AI) business investment (1.7%) and private consumption (0.3%).

This week, US data includes weekly jobless claims, industrial production, regional business surveys, and flash Purchasing Managers’ Indexes (PMI) on Friday. In the UK, CPI is the focal point and is likely to shape the Bank of England’s (BoE) next move. The eurozone flash PMIs will also garner attention, particularly after recent positive economic surprises.

Equities

Global equities chalked up modest gains last week (MSCI ACWI total return +0.7%) as investors breathed a sigh of relief on cooler-than-expected US inflation data. Amid the risk-on environment, a resurgence in the AI infrastructure trade dominated headlines, led by South Korea’s KOSPI Index, which climbed +11.5% after seven weeks of losses, and major memory players (Micron, Samsung, SK Hynix) jumping +13.7% on average.

This was also supported by a confluence of company-specific factors including SK Hynix setting a Q3 timeline for unveiling shareholder returns, an upbeat growth outlook delivered by US memory player SanDisk, and reports of investments in Samsung and SK Hynix by Singapore’s sovereign wealth fund, Temasek. While the global technology sector outperformed on improving sentiment (+1.7%), energy was the standout performer (+5.2%) as oil prices rose (Brent crude +5.9% to USD 88.55/bbl as at Friday) on continued tensions in the Middle East.

We continue to hold a constructive outlook on equities with Q2 results (S&P 500 EPS +32% (adjusted), STOXX Europe 600 EPS +23%) cementing a sustained double-digit earnings cycle in 2026 (+33% expected; second consecutive year). However, we remain mindful of lingering uncertainties, including unresolved geopolitical tensions, inflation’s future path, political headline risks, and monetary policy. This underlines our approach of maintaining a diversified portfolio with limited concentrated bets to start the second half of 2026.

In the coming week, markets will turn to reporting from bellwether consumer companies for a reading on the health of US households. While consumer spending has historically been an important driving force of the US economy, it has taken a back seat in 2026, with AI-related capital expenditure now the dominant economic growth engine.

Earnings growth was solid in Q2, but given ongoing equity market uncertainties, we continue to favour broad diversification over concentrated bets

Fixed income

The week’s US data did enough to all but price out a September hike, sending the front end lower while the long end sold off: 2-year Treasury yields fell 3 basis points (bps) to 4.17%, while 10-year yields rose 5 bps to 4.69%, a twist steepening that leaves the 10-year segment in the middle of the 4.60% to 4.74% range that has held for four weeks. Energy pushed the other way all week as the US promised unprecedented economic measures against Iran while keeping its naval blockade in place, and the International Energy Agency (IEA) warned of the widest global supply deficit in five years (the Strait of Hormuz effectively remains closed, keeping energy prices under pressure).

Europe sold off across the curve, with Bund yields up 7 bps to 3.20%, close to a 15-year high, while gilts rose 12 bps to 5.04% on better-than-expected GDP data; UK job prints on Tuesday and CPI data on Wednesday should give pointers as to whether a September hike is still on the cards.

The US inflation prints were this week’s main focus: July CPI decelerated for a second consecutive month (0.1% m/m and 3.4% y/y), with core CPI showing the lowest annual reading in five months. Producer prices were flat, marking the second consecutive month of flat-to-down final demand. The Fed rate pricing has continued to price out a hike in September, going from a 70% chance in late July to 27% today, while the June 2027 terminal rate has repriced 18 bps lower so far this month. Also noteworthy is that the US Treasury issued USD 25 billion of 30-year bonds at 5.22%, which is the highest auction yield at that tenor since 2001.

Spreads continue to absorb strong issuance, ending the week virtually unchanged and close to post-global financial crisis (GFC) tights. A market taking record supply at these levels is not a market pricing in a turn in the cycle, and this week’s data gave it good reason not to do so. The rating agency narrative for loans is turning, with upgrade-to-downgrade ratios over the last 12 months at their highest since Q4 2022. Technology is the exception, with the weakest agency trends at 13 upgrades against 36 downgrades, followed by chemicals and housing, while industrials, consumer products and healthcare are strongest. The high-yield (HY) reporting season has been strong: 3.8x as many companies beat EBITDA expectations as missed them (45% against 12%), and 2.3x as many guided up as down.

In USD, Treasuries returned 0.1% on the week, investment grade (IG) -0.1%, HY 0.2%, with additional tier 1 bonds (AT1s) and emerging markets (EM) both flat. In EUR, government bonds lost 0.3%, pushing the year-to-date returns into negative territory.

This week will see the publication of the minutes from the Fed’s contentious 28–29 July meeting, which drew three dissenting votes in favour of a hike. The minutes are likely to seem stale in light of events since the meeting. Jackson Hole and core PCE data the following week set the stage for the Fed’s 15–16 September decision.

July’s cooler inflation prints knocked the odds of a September Fed rate hike from 70% to 27%, shifting the path towards a lower terminal rate

Forex & Commodities

The USD edged lower last week, following the publication of July CPI data, which showed that US inflation pressures are likely to have already peaked. Overnight index swap (OIS) markets reduced the probability of a 25-bp September rate hike, and cyclically sensitive 2-year yields fell against the majority of G10 currencies. Overall, there is little to suggest that the USD should rally in the near term.

The USD/CNY fell to levels of below 6.74 – its lowest this year – reflecting the slightly weaker USD. July activity data broadly missed expectations, with retail sales, industrial production data and fixed-asset investment all printing below consensus expectations. The slowing in the domestic growth profile suggests that the People’s Bank of China (PBoC) could reduce the pace of CNY appreciation in the near term. Our year-end target of 6.70 remains unchanged.

The GBP faces headline risks over the coming week with the publication of inflation and unemployment data. July’s Inflation data are expected to print above those of June due to base effects. We note that inflation data have surprised on the downside in recent months, showing limited pass-through from higher energy prices. The publication of unemployment data is the main risk, and a higher-than-expected unemployment rate could result in the market pricing out potential Bank of England (BoE) rate hikes. The OIS market has priced in 50 bps in BoE rate hikes over the coming year, which could re-price to lower levels, thus weighing on sterling. The GBP/USD is unlikely to do a lot in the near term and should continue to trade within recent ranges.

Gold traded higher to levels of just above USD 4,400 per oz, following the publication of US CPI data, which reduced front-end US bond yields. The large decline in FOMC rate-pricing suggests that a lot has been priced in for gold in the near term, and it would require another weaker-than-expected CPI print – or some clarity on the conflict on the Middle East – to push gold towards materially higher levels in the near term. We maintain our expectation that gold could rise to levels of USD 4,800 per oz by year-end.

The USD slipped after July CPI data signalled inflation has likely peaked; there is little reason to expect a near‑term rally

The opinions expressed herein are correct as at 17 August 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.