Market Commentary 18th August 2025 – from Matt Taylor

Rising borrowing costs impacted the FTSE 250 due to its greater exposure to mid-cap and growth-oriented firms that depend more on domestic financing and consumer spending. In contrast, the FTSE 100, which is dominated by multinationals, continued to rise.

UK Gross Domestic Product (GDP) grew 0.3% quarter over quarter in Q2 2025, slowing from 0.7% in Q1 but beating forecasts of 0.1%. The slowdown partly reflects activity pulled forward ahead of April’s stamp duty changes and new US tariffs. Household spending rose just 0.1%, while exports grew 1.6%, outpacing a 1.4% rise in imports.

The unemployment rate stood at 4.7% in the three months to June 2025, unchanged from the previous period as expected by economists. This remained at its highest level since the three months ending July 2021. However, the Office for National Statistics (ONS) data also showed the number of people employed fell by just 8,000 in July, far less than the expected 20,000 decline, suggesting the labour market may be weathering the Labour government’s £26 billion tax hike better than feared.

Most Western European economies saw low to moderate inflation, close to the central bank targets. Germany’s annual inflation rate held at 2% in July 2025, unchanged from June and remaining at its lowest level in eight months. France’s annual inflation rate stood at 1% in July 2025, unchanged from June. Stabilising inflation rates and strong gains in defence stocks supported by geopolitical developments and fiscal commitments increased demand for European assets last week.

The ZEW Indicator of Economic Sentiment for Germany decreased for the first time in four months in August 2025, which was the highest since 2022 and below forecasts. According to ZEW, firms are disappointed with the announced EU–US trade deal. The ZEW indicator experienced a substantial decline, also due to the poor performance of the German economy in the second quarter of 2025.

The Dow Jones Industrial Average increased significantly compared to the S&P 500 and NASDAQ 100, as investors shifted from growth stocks (which dominate the S&P 500) to value stocks (which are more prevalent in the Dow Jones Industrial Average).

The Consumer Price Index (CPI) rose 0.2% in July matching expectations. Meanwhile, core inflation, which excludes food and energy, accelerated to 3.1%, compared to 2.9% in June and slightly above forecasts of 3%. The report was seen as reassuring, reinforcing expectations for a Federal Reserve rate cut in September and the probability surged to over 90%, according to CME FedWatch. The data, combined with a weaker jobs report, suggested the Federal Reserve may prioritise supporting economic growth over counteracting inflation in the short term, in line with President Trump’s wishes.

The Producer Prices Index (PPI) in the United States surged by 3.3% from a year ago, surpassing forecasts of a 2.5% advance. Month-on-month US producer prices rose 0.9% in July 2025, rebounding from a flat reading in June and much higher than expectations of 0.2%. It is the biggest increase in producer prices since June 2022. The data complicates expectations for a Federal Reserve rate cut at its next meeting on 17^th September.

The University of Michigan consumer sentiment for the US notably dropped in August compared to last month and was well below market expectations. Consumer sentiment fell for the first time in four months, which appeared to be mainly due to growing inflation and unemployment concerns as well as sharply worse buying conditions for durable goods.

The world’s two largest economies, US and China, agreed to extend their trade truce for another 90 days. Last week the US and China set a 10th November deadline for lowered tariff rates of 10% on US exports to China, and 30% on US-bound exports from China. Markets around the world rallied when the news was announced. Dissatisfaction with the current US-China trade balance saw Trump threaten tariffs totalling 145% on China earlier this year, with retaliatory rates of 125% prepared by China.

China’s industrial production grew 5.7% year-on-year in July, down from 6.8% in June and below expectations of 5.9%. Meanwhile, retail sales rose 3.7%, also slowing from 4.8% and missing forecasts of 4.6%. This slowdown suggests weaker demand for manufactured goods, possibly due to global trade uncertainty and domestic investment fatigue, while the soft retail figures point to fragile consumer confidence despite ongoing government stimulus efforts.

Japan’s Gross Domestic Product (GDP) grew 0.3% quarter over quarter in Q2 2025, surpassing market expectations, which stood at 0.1%. It was the fifth consecutive quarterly expansion. Analysts cautioned that the full hit to growth may emerge in upcoming data, as Japan now faces a 15% blanket tariff on all exports to the U.S.

GBP / EUR – Current 1.1581 Previous 1.1552

The Pound rose 0.76% against the Dollar last week and there was also a smaller increase against the Euro of 0.25%. It appeared the gains were mainly driven by positive surprises in UK data and a perception that the UK economy is weathering challenges better than expected.