Market Review 11th August 2025

Everything you need to know, Simplified!

Summary

• The Bank of England (BoE) delivered a ‘hawkish cut’ as rates were trimmed to 4% after a rare two-round vote, with inflation still sticky and wage growth at 5%

• Gilt yields climbed, with the 10-year up 7bps to 4.6% as markets price in a slower, more reluctant easing cycle

• Fiscal fragility exposed as high taxes, a non-domiciled exodus, and rising welfare pressures increase risks to UK public finances

• Global equities near record highs, as earnings strength in tech, financials, and consumer discretionary offsets rate and trade worries

• Stephen Miran, a Trump policy architect, joins the Federal Open Market Committee (FOMC) and is set to push for faster rate cuts, pending Senate confirmation

• The week ahead will bring US inflation and UK Q2 GDP.

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Market Review

A hawkish easing cycle

For the first time ever, it took the Monetary Policy Committee (MPC) two rounds of voting to cut UK interest rates last week. The first round saw four votes for a 0.25% cut, four to hold, and one - from Professor Alan Taylor - for a 0.5% cut. In the second round, Taylor shifted to 0.25%, tipping the balance. The split was more hawkish than markets expected, reviving the term ‘hawkish cut’ that has hung over the current easing cycles of both the BoE and the US Federal Reserve (Fed) - shorthand for a grudging, inflation-conscious approach to rate reductions.

The BoE target rate is now 4%. This was the fifth cut of the cycle, each delivered at quarterly intervals - glacial by historical standards. In past easing cycles, moves typically came at every meeting, front-loaded to get ahead of slowing growth. But this is a cycle shaped by flowing fiscal taps, a global economy resilient to higher rates, and inflation that, especially in the UK, has been uncomfortably persistent. Core inflation (excluding food and energy) remains at 3.7% and has shown a slight upward trend since early 2024, while wage growth at 5% is still incompatible with the Bank's target.

In May, the BoE modelled a ‘persistent inflation’ scenario in which the effective rate stays at 4% throughout 2026, only reaching 3.75% in late 2028. Without clearer evidence of disinflation - and barring a sharper economic slowdown - the Bank may now be on hold from here.

Gilt yields rose over the week, with the 10-year yield climbing 7 basis points to 4.6%, reflecting the hawkish tone of this easing cycle. High borrowing costs raise the risk of further tax rises, yet Labour's fiscal track record offers little comfort. Every tax increase implemented so far has failed to reduce the deficit. The exodus of the non-domiciled is accelerating, taxing private schools is forcing closures that add pressure to the public sector and higher National Insurance rates have cut employment while fuelling inflation as businesses pass on costs. These dynamics expose deep vulnerabilities in the UK's public finances, underscoring the urgent need to reform welfare and benefits to restore fiscal stability.

Equities back at all-time highs

After the blip the previous Friday, global equities rebounded last week and now sit just a sliver below all-time highs thanks to strong earnings momentum. Corporate results continue to outpace expectations, with technology, communications, financials and consumer discretionary leading the advance. This earnings strength supports the narrative that the global economy - spearheaded by the US - remains resilient despite headwinds from high interest rates and trade policy uncertainty.

Valuations remain elevated across most metrics, though pockets of relative weakness appear, notably in defensive sectors including healthcare and consumer staples.

Stephen Miran appointed to FOMC

Stephen Miran, Chairman of the White House Council of Economic Advisers and a principal architect of the Trump administration's economic policy, has been designated to fill Adriana Kugler's vacant seat on the FOMC for the remainder of her term.

His November 2024 paper, A User's Guide to Restructuring the Global Trading System, offers perhaps the clearest window into Trump's economic playbook - second only, maybe, to The Art of the Deal. Pending Senate confirmation, Miran's appointment signals a shift in the Fed's policy outlook. He is likely to push the Committee towards a more aggressive easing stance aligned with administration objectives.

Miran's perspective will now have direct influence on monetary policy.

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The week ahead

Tuesday: US inflation

Our thoughts: Inflation is expected to slow to 0.2% month-on-month, while the annual rate is anticipated to tick higher to 2.8% thanks to base effects. Markets will be watching for signs of tariff passthrough into goods prices, which has so far been limited. Companies appear to be absorbing costs for now, but as trade tensions settle, rising input costs could test profitability. Margins are at record levels, providing some cushion, but investors will watch closely for signs of compression as the year progresses - otherwise, those cost increases will start to show up in goods prices.

Thursday: UK GDP

Our thoughts: Growth is expected at 0.1% in Q2, down sharply from 0.7% in Q1, driven by higher taxes and global trade policy uncertainty.

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