Softer Inflation, a Steady Hand, and a Rotation Underway
July brought a marked shift in the data. US inflation cooled by more than expected, the three major central banks all held rates but signalled diverging paths, and equity markets moved in two directions at once — a sharp reversal in AI-exposed technology names alongside a rotation into value, cyclicals and equal-weighted exposures. The Middle East ceasefire held through the month, though the framework for a permanent Strait of Hormuz agreement remained under negotiation. As we move into August, some of the pressure that defined the first half of the year has eased, but the picture is not yet settled. Here is our read on what happened and what to watch over the coming weeks.
Equities: A Rotation Beneath the Surface
US equities delivered a split story in July. The S&P 500 finished the month essentially flat, snapping a run of consecutive positive Julys, while the Nasdaq-100 fell around 7%, its steepest monthly decline since March 2025. The PHLX Semiconductor Index dropped about 20% on the month as investors reassessed the pace and returns of AI-related capital spending. Beneath the headlines, the market rotated: the S&P 500 Equal Weight Index outperformed the Nasdaq-100 by several percentage points, and value, small-cap and defensive names carried relative strength as leadership broadened away from the year’s mega-cap concentration.
Earnings, however, kept the broader picture intact. Roughly 86% of S&P 500 companies that had reported by month-end beat consensus earnings estimates and around 77% beat on revenue, both well above their five-year averages. Blockbuster results from Microsoft and Amazon late in the month lifted sentiment around AI monetisation and pulled indices back from earlier weakness. Heading into August, the key question is whether the rotation continues to broaden the market or whether concentration risk reasserts itself as the remainder of the reporting season plays out.
Geopolitics and Energy: A Fragile Ceasefire, a Partial Reopening
The US–Iran ceasefire broke down in early July, with renewed strikes and shipping restrictions returning to the Strait of Hormuz — a waterway whose flows are equivalent to about 20% of global petroleum-liquids consumption (EIA). ICE Brent front-month futures rose approximately 24% over the month and settled at around US$90.12 per barrel on 31 July (Rigzone; ICE settlement data), Brent’s strongest month since March. Prices then eased in the first week of August, trading near US$79 per barrel on 6 August, but the July move higher was substantial. On the diplomatic front, Iran and Oman had by early August reached a preliminary understanding on a proposed shipping route through the strait, though important terms remained unresolved and safe passage was not assured.
For August, the trajectory of the ceasefire and Hormuz negotiations remains one of the most important variables across asset classes. A durable and enforceable route understanding may be disinflationary for energy and could ease pressure on central banks. A further breakdown, or renewed strikes, could reverse that quickly. Shipping data indicates transit volumes remain below normal, and the recovery is partial rather than complete.
Central Banks: Three Holds, Three Different Balances
The late-July round of central bank meetings resolved in a way markets had partly priced but not entirely. On 23 July, the ECB held its three key rates unchanged, leaving the deposit rate at 2.25% after June’s hike. President Lagarde flagged that the longer energy prices remain elevated, the more likely they are to feed through to broader inflation via second-round effects, and signalled the Governing Council may move again in September if the data supports it.
On 29th July, the Federal Reserve held the federal funds target range at 3.50%–3.75% in a 9–3 vote, with Beth Hammack, Neel Kashkari and Lorie Logan dissenting in favour of a 25 basis-point hike — the most dissents in a single direction at an FOMC meeting since September 2016. Chair Kevin Warsh, in his second meeting, described the decision to avoid forecasting in the policy statement as “especially prudent at these uncertain times,” and continued the shift away from explicit forward guidance.
On 30th July, the Bank of England held Bank Rate at 3.75% in a 6–3 vote, with three MPC members voting for a 25 basis-point hike, up from two in June. Governor Andrew Bailey noted that UK CPI had fallen faster than expected but flagged that energy prices remain elevated and volatile.
For August, the direction of travel across the three banks is now clearer even where the destination is not. The Fed has paused with a hawkish tilt inside the committee; the ECB has left the door open to a further move; and the BoE is holding while the internal case for tightening has broadened.
Inflation: A Cooler US Print, a Firmer Eurozone Reading
Inflation data released during July reshaped expectations on both sides of the Atlantic. US CPI for June, released on 14th July, fell 0.4% on the month and rose 3.5% over the year, down from 4.2% in May and below consensus expectations — the largest one-month decline in the headline index since April 2020. Core CPI was unchanged month-on-month and stood at 2.6% over the year. In the UK, June CPI came in at 2.6%, down from 2.8% in May. In the euro area, annual HICP inflation eased to 2.8% in June before Eurostat’s flash estimate placed July inflation slightly higher at 2.9%, with energy inflation rising to 10.0% and services inflation edging up to 3.3%.
Asked at the 29th July press conference how much the June CPI print had influenced the Fed’s decision, Chair Warsh said “not much” — the FOMC’s hold was framed against the broader uncertainty in the data, rather than driven by any single release.
Currency Markets: Dollar Firm, Range-Bound Pairs
The US Dollar Index traded around 101 through much of July, easing mid-month to about 100.9 after the cooler CPI print before recovering into the late-month central bank meetings. EUR/USD had already printed a one-year low near 1.1325 on 1st July (based on late-June trading) before stabilising, while GBP/USD touched a year-to-date low around 1.3140 and recovered to about 1.3376 immediately after the BoE decision. GBP/JPY traded in a range of approximately ¥212.2–219.5 through July, including an 18-year high around ¥219.6, with the yen continuing to reflect the Bank of Japan’s slow move toward its terminal rate alongside broader risk sentiment.
For August, the three pairs relevant to the Fund’s strategy may remain reactive to incoming inflation data, ceasefire developments and central bank commentary heading into the September meetings. If the Hormuz agreement is signed and risk appetite recovers, defensive dollar flows could unwind. If inflation surprises on either side of the Atlantic, or if the ceasefire falters, intraday volatility across these pairs may remain elevated.
Five Things to Watch in August
Ceasefire durability and the Strait of Hormuz agreement. The single most important variable across asset classes. A signed interim agreement and continued recovery of shipping volumes may be disinflationary for energy and supportive of a calmer rate outlook. A breakdown in negotiations, or renewed strikes, may do the reverse.
Jackson Hole Economic Symposium (27th–29th August). Chair Warsh’s first Jackson Hole address as Chair. Markets are likely to scrutinise the speech and the surrounding programme for signals on how the Fed frames the balance between cooling inflation and the internal case for tightening.
US July CPI, released 12th August. After June’s larger-than-expected decline, the July print will test whether the disinflation trend is broadening. A second cooler print may soften the internal hawkish dissent at the Fed. A hotter print may harden it.
Continued Q2 earnings and the AI rotation. With around 86% of reporters beating on earnings so far but concentration risk still visible, remaining reports across technology, financials and consumer sectors may test whether the rotation into value and equal-weighted exposures continues.
Eurozone August flash HICP and pre-September data. With July HICP rising slightly to 2.9% and energy inflation firming, incoming euro area prints will shape expectations for the ECB’s 10th September decision.
Overall, July shifted the balance of risks again. Inflation cooled meaningfully in the United States, the three major central banks held rates but leaned in different directions internally, and equity markets rotated rather than resolved. The energy shock that dominated the first half of the year has continued to ease, though the Hormuz agreement is not yet complete. August, with the Jackson Hole symposium, further inflation prints, and the tail of the Q2 earnings season, is a month to watch the data closely. Markets may remain volatile while investors monitor incoming data.
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