U.S.
In the United States, the economy contracted at an annualized rate of 0.5% in Q2 2025, marking the first quarterly decline in three years. Consumer spending grew by only 0.5%, a sharp slowdown from the 4.0% surge in Q4 2024. Core inflation re-accelerated to 2.9 % in June, and policymakers warned Trump’s tariffs risked keeping price pressures elevated. Inflation is projected to rise to 3.4% by mid-2026, driven by policy shifts and lingering supply-side pressures. The dollar continues to weaken, supporting financial conditions but adding to inflationary risks.
This backdrop kept the Federal Open Market Committee cautious; the 29-30th July meeting ultimately left rates unchanged at 4.25–4.50% and signalled that rate cuts might come later in the year if inflation slowed. Markets that had fully priced a September cut dialled back expectations as policymakers emphasised patience.
Stock performance reflected this uncertainty. S&P 500 earnings were strong, led by technology and AI-related firms, but the index rose 2.5% over the month as investors digested the effect of Trump’s trade deals. A late July Reuters report noted that the top ten stocks accounted for 37.3 % of the S&P 500’s weight, and Nvidia alone outweighed five entire sectors, meaning any disappointment from mega-caps could sway the entire market.
Treasury yields were volatile: ten-year yields fell early in the month as investors sought safety ahead of the Fed meeting but rose again when the U.S.–European Union trade deal triggered a jump in the dollar. By the month’s end, the yields hovered near 4.40%. Oil prices staged a sharp rally when Trump threatened to sanction countries buying Russian crude; Brent crude gained over 5% in July and West Texas Intermediate (WTI) moved above $81 per barrel. Gold edged lower after the dollar strengthened, reflecting a fading safe haven bid. The Dollar Index jumped over 1% on July 29, its best day this year, as investors shed the “tariff risk premium”. By the month end, however, gold regained ground on falling Treasury yields.
Eurozone
The eurozone navigated July’s turbulence better than expected. Flash purchasing managers’ index data showed business activity growing at an 11-month high; the HCOB composite PMI climbed to 51.0, and a resurgence in services suggested the manufacturing recession was easing. Input price pressures continued to retreat, with the services input prices index falling to 56.7. Inflation is moderating toward the 2% target, yet companies surveyed by the European Central Bank warned of slowing activity and intensified competition from Chinese firms as U.S. tariffs diverted trade flows.
Against this backdrop, the European Central Bank kept its deposit rate at 2% on July 24. President Christine Lagarde reiterated that decisions would remain data dependent and noted domestic price pressures were easing while wages slowed. Policymakers avoided pre-committing to further cuts because of the unresolved U.S.–EU trade negotiations; diplomats said a 15% tariff on EU goods was on the table. The ECB recognised that such a tariff could depress growth and push inflation below its target, but with eurozone data still resilient, it opted to wait until autumn. Board member Piero Cipollone later remarked that inflation risks remained “balanced” and that the broader Governing Council’s assessment since June was little changed. Equity markets responded positively: the Euro Stoxx 50 gained by 2%, helped by cyclicals. However, the Euro slid to a one-month low as traders braced for tariffs and the possibility of the ECB staying on hold while the Fed considered cuts.
UK
The United Kingdom is expected to grow by 1.2% in 2025, slightly above the previous year’s 1.1%. Increased defense investment and a trade agreement with the U.S. are providing some support. Inflation remains above the 2% target, sustained by wage growth. Consumer price inflation unexpectedly accelerated to 3.6 % in June, the highest since January 2024, driven by motor fuel, transport and recreational services. Services inflation stayed stubbornly high, and the BoE warned that wage growth remained elevated. Meanwhile, business activity lost momentum: July’s composite PMI slipped to 51.0, the weakest since February, and employment gauges signalled labour market softening. Firms reported passing on higher taxes and tariffs to customers, keeping price pressures intense.
In light of these crosscurrents, the BoE’s Monetary Policy Committee meeting on August 7 is widely expected to deliver a 25bp rate cut but with a divided vote. Deputy Governor Dave Ramsden hinted that further reductions would be gradual, emphasising that inflation remained above the 2% target. Fiscal policy has become more restrictive, limiting the impact of monetary easing. Markets priced just two cuts through year-end. UK equities proved resilient; the FTSE 100 hit a series of record highs closing the month over 4% up. Ten-year gilt yields oscillated around 4.5 % as traders reassessed the pace of easing. The pound remained under pressure against the dollar amid concerns about the trade war and questions over Britain’s new trade agreement with the U.S., which retains tariffs on key goods but offers improved access in sectors such as services.
China
Chinese markets were a rare bright spot. After months of stimulus and a thaw in trade relations, the MSCI China Index surged about 25% year-to-date through July 25, more than double the MSCI All Country World index’s 12 % gain and well ahead of the S&P 500’s 9% rise. This rally owed less to cyclical recovery and more to a sense of “cool” around Chinese innovation. As an opinion piece from Taosha Wang observed, the country’s electric vehicle champion BYD now sells one in every five EVs globally, surpassing Tesla, thanks to a decade of investment in charging networks. Chinese firms also pioneered livestream e-commerce and opensource AI collaboration, with DeepSeek’s R1 model drawing global attention. These factors helped offset trade war volatility. Rare earth exports resumed, and U.S. chip restrictions eased, feeding hopes of a durable U.S.–China detente.
Yet structural headwinds persisted. Industrial profits declined 1.1% year-to-date despite stimulus measures. Price wars in EVs and food delivery forced authorities to intervene, and youth unemployment remained elevated at 14.5%, far above the overall 5% jobless rate. Beijing’s expanded consumer subsidy program and support for property developers provided some relief but underlined the fragile domestic demand. Mainland equity markets showed resilience despite the ongoing volatility around tariffs and trade deals; the Shanghai Composite ended July with returns of 4%, while Hong Kong’s Hang Seng gained over 3.5%. The yuan strengthened slightly as investors viewed the U.S.–China tariff truce as more durable, though policymakers continued to ease liquidity through medium-term lending facility (MLF) injections.
Japan
Japan’s economy enjoyed a period of stability as trade uncertainty eased following the U.S.–Japan tariff deal. The Bank of Japan held its short term policy rate at 0.5 % at its July meeting but signaled that rate hikes could resume later in the year. Deputy Governor Shinichi Uchida said the trade deal reduced uncertainty but cautioned that the impact of U.S. tariffs on exports would take time to show up in data. Japanese equities responded favourably; the Nikkei 225 rose around 3% in July, supported by a weaker yen and strong earnings from exporters.
Inflation in Tokyo, often a leading indicator for national prices, remained above 3% as rising prices and food costs more than offset the withdrawal of energy subsidies. Although manufacturing PMI remained in contraction, the index climbed to 48.5, it’s highest in several months, and export orders showed signs of stabilisation. These developments, combined with the trade deal, encouraged investors that Japan can continue normalising its monetary policy.
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This Market Review is for general information purposes only and does not constitute financial, legal, or tax advice. Data has been sourced from publicly available materials, including the Federal Reserve, ECB, Bank of England, IMF, JPMorgan, Schroders, Reuters, and other official institutions. Past performance is not a reliable indicator of future results. You should always seek personalised advice from a qualified adviser.
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