What the FTF?! The roof won’t fix itself

On the surface, we appear to remain in a holding pattern. Scratch the surface though and, in multiple instances, change is here or in the diary for the not too distant future, with real impact. Continued conflict and lack of resolution, whilst remaining relatively contained, does require thoughtful reengineering as a prolonged continuation feels inevitable. Amongst all of this we have the return of the tariff debate as narratives and direction of both inflation and rates continue to converge. In short, lots to summarise to stay on top. So let’s get into it!

Macro

Once again, a trade deal has collapsed between the US and Canada. This time, though, it is different. A chunky 50% on anything moving south of the border and impacting approximately $20 billion of goods and services. As always though, context is important. In 2025 alone, US imports totalled over $450 billion. When looking at the Canadian numbers, of roughly $425 billion, the gap – $20 billion-ish likely being no coincidence – would effectively flatten out the difference by taxing it (USA Facts). 
As for the escalation in the Middle East, as of Tuesday, the US Treasury unveiled further measures designed to squeeze Iran into submission, this time by punishing third countries supporting Iran. Broadening of conflict, in all forms, and forcing the drawing of borders and allies/enemies does not feel like progress here rather further entrenchment and resentment. Attempts at squeezing a country that has spent decades manoeuvring such policies is not expected to yield much, bar further disruption, to me at least. 
Gold, though, has performed well. Continued central bank buying (and in some instances pivoting from US Treasuries just as net issuance has topped $40 trillion), the Strait of Hormuz risk premium, and continued inflation concerns have supported a rally to the tune of almost 14% since my last musings (Trading Economics).

Risk

Earnings season is now all but done. While the headline numbers for Q2 2026 are striking, the underlying concentration risk remains high. According to the data (XTB), alongside the 86% of companies beating earnings estimates, 77% have also exceeded revenue forecasts. The S&P 500’s blended year-over-year earnings growth rate amounted to an impressive 47.4%, its strongest showing since the end of 2021. However, this outperformance is heavily skewed by mega-cap tech and international conglomerates. Excluding just Alphabet and Amazon, the index's projected earnings growth would fall sharply to 28.8%. Furthermore, businesses generating over 50% of their revenue internationally are reporting a massive 74.7% earnings growth, drastically outpacing the 35.5% growth seen by primarily domestic companies. This divergence suggests that while aggregate corporate profitability appears exceptionally robust, much of the heavy lifting is being done by a handful of tech giants and overseas operations rather than broad-based domestic economic strength. The market remains somewhat ambivalent towards those outperforming in revenue. A 0.04% outperformance from holding “winners” feels almost insulting for this section of financial markets (BlackRock). Concerns remain around the timeline for CapEx monetisation in tech (and whether it even comes!) as well as those ongoing macro headwinds of tariffs, and war. The last month has seen the Nasdaq, S&P 500, and Dow rise 1.3%, 0.8% and 0.4% respectively. In part, explainable by already historically high price-earnings ratios (Wall Street Journal).
Globally, developed markets also ticked higher, with the Eurostoxx 50, Japan’s Nikkei, and the UK’s FTSE 100 climbing 2.8%, 0.8% and 2.0%. China‘s CSI 300 was the biggest negative outlier dropping 3%. What the numbers don’t capture though is the degree of volatility seen in South Korea, led by exposures to AI and (computer) chips. Over the past three weeks, the range of 5300 to 7100 has been quite the ride (Bloomberg). Just wild.

Credit

Issuance, as one might expect, is up year-on-year, given the net borrowing coming from all things tech. Compared to this time last year we are 6.4% ahead of 2025. Worth remembering, all this with what has been a considerably trickier and more volatile period since war broke out late February. 

In numbers, Europe’s primary market roared back from its summer lull with €38.3bn priced in the week of 17-21 August against just €5.8bn across the first two weeks of the month – the fastest post-summer restart on record. Despite all this new issuance, spreads have remained steady. As benchmark yields have risen, so too the respective coupons as folks far and wide look to these calmer times in capital markets to raise, hedging any potential volatility that may arise later in the year.
In the US, investment-grade spreads remain at multi-decade tights (think cheap to borrow). It remains a similar story in US high-yield (aka junk/speculative-grade borrowing) despite all the headlines pertaining to private credit and the associated redemptions and writedowns witnessed (FRED).

EUR

The Governing Council meeting where rates are set, held on July 23rd, held rates at 2.25% in a unanimous vote. ECB President Lagarde did share though that some voting members had questioned whether they should be pushing for a hike. In short though, “the burden of proof is on data, as simple as that” (European Central Bank). With that, the market, having looked at said data, has almost all chips (24 basis points priced) on the next meeting bringing an additional 0.25% of tightening, on September 10. As for further out, the next hike is almost fully priced-in for December.
Helpful as a combatant against additional hikes, as salaries (in the form of “compensation per employee”) reduced from an annualized 3.8% to 3.5% for July (European Central Bank). More broadly, July CPI is expected to remain flat at 2.9% versus June, and 0.9%, or 45% above target.
Eurozone GDP grew 0.4% q/q in Q2 (1.0% year-on-year), up from flat in Q1, with Ireland the standout at +3.9% and Germany, France and Italy each at +0.2% (Eurostat).
One area of note is France’s fiscal risk which continues to rise. The 10-year OAT yield crossed 4% on 23 July and rose above 4.1% by mid-August – the highest since June 2009. All this as (current) Prime Minister Lecornu works on a 2027 budget without a parliamentary majority. Fitch’s review of France’s A+ rating is due 28 August (Brussels Signal). 

GBP

The MPC held Bank Rate at 3.75% in a 6-3 vote at its 29-30 July meeting, one of its most hawkish splits in years. Three dissenters (Greene, Pill, Mann) wanted an immediate 25bp hike on second-round inflation risk from energy prices, while Governor Bailey flagged the Middle East conflict as an upside risk; with the next decision due 17 September (FXStreet) with the first full hike not priced in until three meetings out, 8 days before Christmas and 25 basis points in size . As for a potential terminal rate (or peak in this cycle), thankfully it remains not far further north from here, implied at 4.35% and by July 2027 (Bloomberg WIRP, 25 Aug 2026).
UK CPI jumped to 2.9% YoY in July from 2.6%, the highest since March. Mostly driven by higher energy bills. Core inflation held at 2.6% (hotter than the 2.5% forecast) while services inflation eased to 3.4% from 3.6%. In short though, all remain above target, and for a rather prolonged period at this point in time. 

UK GDP grew 0.3% month-on month in June (May revised down to flat) and 0.4% quarter-on-quarter in Q2 (1.2% year-on-year), following 0.6% growth in Q1 (ONS).

As for the labour market, unemployment held at 4.9% in the three months to June, with regular pay growth still elevated at 3.5% and total pay (which includes bonuses) at 4.1%. Payrolls though, fell 78K year-on-year (ONS).
As for the politics and impact on capital markets, Andy Burnham became PM on 20 July, replacing Rachel Reeves with John Healey as Chancellor, and the change pushed the 30-year gilt yield to a two-month high near 5.75% on fiscal-credibility concerns. Healey’s first Budget is set for 28 October, with the OBR to publish updated forecasts the same day ( IG). Hoping for everyone back in Blighty that Halloween does not come early this year.‍

USD

The FOMC also held rates at 3.50-3.75% at their latest meeting (July 29) with a split vote of 9 to 3. All three dissenters were in favour of a hike. Market pricing since puts the effective Fed funds rate at 3.63%, with the market pricing roughly 10bp of further tightening by the 16 September FOMC meeting (implied 3.73%), meaning a cumulative 26bp(ish) by December (3.89%), and a terminal rate near 4.07% priced by July 2027 Bloomberg WIRP, 25 August). The accompanying statement, which is considerably shorter these days, stated inflation “remains elevated relative to the Committee’s 2 percent goal, in part reflecting supply shocks that have driven price increases in certain sectors, including energy” Federal Reserve. This implies to me, at least, that waiting and seeing is outweighing tackling what has now been an ongoing theme for years of accepting higher price rises. 

Some signs of this being true did come in the July inflation figures though,  US CPI cooling to 3.4% year-on-year from 3.5%, core to 2.5% from 2.6% versus June whilst shelter remained the biggest driver and energy was still up 14.7% year-on-year (BLS).  The Fed’s preferred gauge told a hotter story with core PCE running at 3.3% in July (the latest available reading, BEA).
The labour market appeared to crack though with nonfarm payrolls falling 23,000 in July against expectations of +83,000. The first negative print in recent coverage, whilst the unemployment rate held at 4.1% and wage growth slowed to 3.2% (on an annualised basis), the weakest since May 2021. May and June figures were also revised down by a combined 103,000 (BLS).

Away from Canada, tariffs kept shifting legal footing. After February’s Supreme Court ruling struck down IEEPA tariffs, the replacement Section 122 surcharge expired on 24 July and was immediately replaced by Section 301 “forced-labor” tariffs on 60 economies, taking China’s aggregate rate to 37.5% (Honigman) and in effect offering no reprieve. 

The Federal Reserve’s Jackson Hole Economic Policy Symposium runs 27-29 August, and Kevin Warsh delivers his first keynote as Fed Chair on Friday 28 August at 8am ET, under the theme “Financial Innovation: Implications for Payments and Policy.” Given how sharply markets moved when he stayed noncommittal in July, and with the Treasury’s buybacks under fire as “financial repression,” this is being read as his last chance before the 15-16 September FOMC to give clarity on where he actually stands on long-end yields and the Treasury’s interventions – or risk another repeat of July’s reaction (Fortune).

So what? 

Rates continue to track higher, along with the buildup of risk both in assets and geopolitically. We have made it through the summer unscathed, with judgement likely to be passed with conviction on direction into the tail end of the year post the return of other professionals currently enjoying the hiatus. To predict the future is typically to be wrong. To not be prepared and well-positioned for all of the potential outcomes though, foolhardy. The sun is shining, if the roof needs fixing, there is no time like the present.