Market Review 1st September 2025
- Simplicity News Desk
- Aug 31
- 4 min read
Everything you need to know, Simplified!
Summary
UK may be drifting to the wrong side of the Laffer curve (explained below), with record millionaire outflows and heavy reliance on top earners
The fiscal backdrop remains strained: large deficits, stagnant growth and no appetite for spending cuts
UK gilt (government bonds) yields hit 5.6%, above former PM Liz Truss-era highs, though this climb reflects fundamentals rather than panic
In the US, Federal Reserve (Fed) Governor Christopher Waller signalled cuts are coming, citing growing labour market risks
Trump’s move to fire Fed Governor Lisa Cook and looming tariff battles set the stage for a clash over central bank independence.
Market Review
The Laffer curve
If you tax someone at 0% you raise no revenue. If you tax someone at 100% you also raise no revenue. The relationship between tax rates and the amount collected is not linear, at some point you over disincentivise productivity and incentivise evasion and emigration. Therefore, the optimal level of tax is somewhere between 0 and 100%. This is known as the Laffer curve.
Fresh analysis from Stephen Jen, renowned macro strategist previously at the IMF, suggests that the UK may have passed the point at which further tax hikes create additional revenue. As Jen points out, the UK has historically exhibited Laffer curve characteristics with the highest taxpayers having a high degree of optionality. The top 10% of UK earners account for 60% of income tax revenues. In 2025, the UK has seen an exodus of millionaires, the highest of any country and more than double the number leaving China.
The fiscal backdrop is certainly difficult. The UK’s cumulative deficit since 2020 has dwarfed most of its European peers, entitlement spending remains politically untouchable and economic growth is stagnating. Jen highlights the contrast with Italy, which has pursued tax incentives to attract skilled workers and strengthen its fiscal base, while the UK has instead opted for ever-higher taxes alongside limited policy imagination post-Brexit. Add in stubbornly high welfare costs, immovable public pensions and a lack of appetite for spending cuts and it’s clear why markets are demanding a greater premium to finance UK debt.
UK gilt yields continue to push higher, with the 30-year yield closing at 5.6%, a level last seen in the late 1990s. Still, there is a difference between today and the Truss-era panic. Back then, gilt yields spiked violently. This time, the climb has been more gradual, driven by fundamentals rather than panic. The result is that yields now sit above the highs reached during the Truss era. The UK may indeed be flirting with the wrong side of the Laffer Curve – but with Gilt yields now the highest of the developed world, markets are already treating it that way.
From shooting the messenger to firing the Cook
Moving to the US, core PCE – the Fed’s preferred gauge – rose 0.3% month-on-month, broadly in line with expectations. Economic data in the US has been robust but showing a slightly softer tone, with a weakening labour market the greatest concern.
Fed Governor Christopher Waller warned that upcoming revisions to labour market data could reveal outright payroll declines in recent months. He stuck to his call for a cut in September, noting “downside risks to the labour market have increased.” That is about as blunt a signal as we’ve had yet from inside the Fed that policy easing is on its way.
President Trump pushed ahead with plans to fire Fed Governor Lisa Cook, citing allegations of mortgage fraud – allegations Cook is now contesting in court. The move has triggered a legal fight that could set a precedent for central bank independence.
On top of that, an appeals court declared most of Trump’s tariffs illegal, though they remain in place pending what looks set to be a Supreme Court showdown.
Equity markets digested the noise with relative calm, though Friday saw some wobble led by technology and AI. Rotation into smaller companies and cyclicals continues, with energy leading the pack last week.
The week ahead
Tuesday: Eurozone inflation
Our thoughts: Eurozone inflation is anticipated to tick higher to 2.1% driven entirely by energy base effects. In contrast core inflation is anticipated to tick lower to 2.2% from 2.3%.
Friday: US employment data
Our thoughts: Economists expect job growth to remain steady in August, with unemployment edging up to 4.3%. But with recent revisions exposing how unreliable labour data has become, surprises may prove more noise than signal. Even so, given the current focus on the labour market surprises could trigger a reaction.
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