Markets had plenty to digest this week but got off to a positive start.
UK inflation unexpectedly fell to 2.6% year-on-year in June from 2.8% in May, driven largely by lower motor fuel prices, particularly diesel, and easing food costs as input prices declined for the first time since January amid lower Brent crude prices. Core inflation, which excludes food and energy, remained unchanged at 2.6%, slightly above expectations. The softer inflation reading was accompanied by further signs of a cooling labour market, with unemployment rising to 4.9% in the three months to May, private sector wage growth slowing to 2.9% (its weakest pace since 2020), and job vacancies continuing to decline. Together, these trends are likely to reduce pressure on the Bank of England to raise interest rates later this month, even as wage growth continues to surpass inflation. While policymakers will welcome inflation moving closer to the Bank’s 2% target, Ofgem’s latest energy price cap, which came into effect this month, means household energy prices are around 13% higher than a year ago and could push inflation higher again in the months ahead.
Traders were confronted with a fresh escalation in Middle East tensions after the Houthis in Yemen declared a maritime embargo on Saudi Arabia, opening up another potential front in the conflict and raising concerns given the group’s support for Iran. Oil prices initially rose on the news but later eased back as investors remained hopeful that a more concrete peace agreement between the US and Iran could still be reached. That optimism has been fuelled by reports that both sides are working behind the scenes on a potential ten-day ceasefire, which could serve as a solid step towards ending the conflict.
Meanwhile, negotiations to revise the United States-Mexico-Canada Agreement (USMCA) are back in focus. The latest round of talks, expected to last three days, is taking place without Canadian officials after the US declined to renew the agreement in its current form at the 1 July review, triggering annual reviews while negotiations continue. President Trump has also announced a fresh wave of tariffs on Canada, proposing duties on nearly $20 billion of Canadian exports. The talks come as the growing US trade deficit with Mexico remains a key point of contention, with Washington also seeking to curb the use of Mexico as a production base to bypass tariffs on Chinese goods.
Japan was also in focus this week after Prime Minister Sanae Takaichi unveiled her first economic policy blueprint, outlining plans to channel more investment into strategic growth industries by strengthening collaboration between the public and private sectors. Despite the growth-focused agenda, markets remained cautious as attention centred on Japan’s bond market, with investors continuing to question the country’s fiscal outlook and the independence of the Bank of Japan. The government later amended an earlier version of the blueprint after concerns that its wording could be interpreted as encroaching on the central bank’s role, reaffirming that monetary policy decisions rest solely with the Bank of Japan.
This week, investors will turn their attention to earnings from Tesla and Alphabet, with particular focus on Alphabet’s results for further insight into the resilience of demand across the technology sector and the ongoing strength of artificial intelligence-related investment. We also have the ECB’s latest interest rate decision on Thursday, Japan’s inflation rate on Friday as well as UK retail sales.
Nicola Tune, Portfolio Specialist