Market Commentary 1st September 2025 – from Matt Taylor

Bank of England’s Catherine Mann warned that UK inflation may remain above target until mid-2027, driven by persistent pressures in services and food prices. Speaking at the Future of Central Banking conference last week, she argued for holding interest rates steady despite the recent cut to 4.00%, citing elevated wage growth and entrenched inflation expectations. While maintaining a hawkish stance, Mann noted that any future rate cuts would need to be swift and data-driven, should downside risks to demand intensify.

UK bank stocks declined sharply on Friday amid growing investor anxiety over potential tax hikes ahead of the autumn budget. NatWest fell 4.85%, Lloyds dropped 3.4%, and Barclays and HSBC also slipped, as speculation mounted that Chancellor Rachel Reeves may target the financial sector to plug a £30 billion fiscal gap. While the Treasury reiterated its commitment to supporting financial services, industry leaders warned that additional levies could undermine the UK’s competitiveness, especially given the sector already faces some of the highest tax burdens among major economies.

Germany’s business sentiment showed modest improvement in August, with the ifo Business Climate Index rising to its highest since May 2024. Expectations for the coming months improved, though current assessments slipped slightly, potentially showing a fragile recovery. Manufacturing sentiment remained subdued due to weak order volumes, although capital goods producers expressed cautious optimism.

In contrast, Germany’s consumer confidence deteriorated sharply in August, with the GfK Consumer Climate Indicator falling to its lowest since April. Income expectations fell amid rising concerns over job security, inflation, and global trade tensions. Retail sales also contracted by 1.5% in July and inflation ticked up to 2.2%, driven by higher food prices and a smaller drop in energy costs, keeping pressure on household budgets and dampening hopes for a near-term recovery.

French consumer confidence weakened in August, with the confidence index falling to its lowest level since October 2023, amid growing pessimism over household finances and rising unemployment. Inflation eased to 0.9% in August, driven by softer services and energy prices, though monthly price growth accelerated due to seasonal factors. Despite subdued consumer sentiment and spending, GDP grew 0.3% in Q2, offering a modest sign of resilience in the economy.

US durable goods orders fell 2.8% in July, extending June’s sharp decline, as firms continued to scale back after front-loading imports earlier in the year to avoid new tariffs. Despite the drop, the figure was slightly better than expected, suggesting some resilience in underlying demand.

GDP growth rebounded to 3.3% in Q2, driven by stronger investment and consumer spending, alongside a sharp drop in imports, which positively contributed to the headline figure. However, declines in exports and government spending tempered the overall momentum, highlighting a mixed recovery.

Inflation remained firm, with core Personal Consumption Expenditures (PCE) rising 0.3% month-on-month and 2.9% year-on-year, the highest in five months. Personal income and spending both rose in July, with spending up 0.5%, the strongest in four months, led by a rebound in durable goods. Meanwhile, jobless claims edged lower, indicating continued labour market stability, despite broader economic uncertainty.

China’s industrial profits fell 1.7% year-on-year in the first seven months of 2025, reflecting weak business and consumer confidence. Losses deepened among state-owned firms, while private sector growth remained modest. Sector performance was mixed, with declines in coal, oil, and chemicals offset by gains in agriculture, electrical machinery, and tech. July marked the third straight monthly drop, though the pace of decline slowed. Geopolitical tensions eased as India and China moved to improve ties, as US-India trade relations worsened following higher tariffs on Indian exports.

Japan’s economy showed signs of moderate recovery, with the coincident index, which is designed to measure the current state of economy, rising to its highest level since February and consumer confidence improved across all components. The unemployment rate fell to 2.3%, its lowest since 2019, despite a slight dip in labour force participation. Retail sales growth slowed to 0.3% year-on-year in July, the weakest pace since early 2022, as inflation and tepid wage growth weighed on spending.

Inflation in Tokyo eased to 2.5% in August, remaining above the Bank of Japan’s 2% target and sustaining speculation of further rate hikes. Core consumer price inflation, which excludes food and energy prices, slowed for the third straight month, while Governor Ueda signalled that rising wages and a tightening labour market could support future policy tightening. The BOJ held rates steady in July but raised its inflation outlook and struck a more optimistic tone on the economy.

GBP / EUR – Current 1.1555 Previous 1.1545

The Pound slipped 0.16% against the US Dollar last week, mirroring the previous week’s decline, while it edged up 0.09% against the Euro. The continued strength of the Dollar was driven by speculation around a potential interest rate cut by the Federal Reserve, whereas weakening consumer confidence in Europe weighed on the Euro.