Fed Divisions Grow as Long Term Yields Test New Highs

Fed Caution Fuels Volatility Across Global Equity Markets

The Federal Reserve (Fed) left interest rates unchanged at its latest policy meeting, as widely expected, although the decision masked a degree of disagreement among policymakers. Notably, three voting members favoured an immediate rate increase, underlining continued concerns around inflation and its potential persistence. Markets, which were already volatile heading into the meeting, became even more unsettled after Chair Kevin Warsh offered limited guidance on the future path of policy. Both equities and bonds sold off sharply in the immediate aftermath before recovering some ground later in the week. Despite the rebound, the move in bond markets remained notable. A further steepening of the US yield curve pushed longer-dated borrowing costs higher, with the yield on the 30-year Treasury rising above 5.2% for the first time since 2007¹. Strong gains towards the end of the week were enough to lift the S&P 500 to a weekly gain of +1.0% (in dollars), but that headline figure disguised a highly volatile period of trading. The combination of the Fed meeting, shifting headlines surrounding the US-Iran conflict and rapidly changing sentiment towards the artificial intelligence (AI) value chain pulled markets in different directions throughout the week.

Elsewhere, European equities continued to move higher last week, with both German and French markets delivering particularly strong returns and helping push several regional indices to fresh record highs. The FTSE 100 also reached a new all-time high (weekly gain of +1.2%), benefiting in part from investors rotating away from some of the more richly valued areas of the global technology sector. Given its relatively limited exposure to large-cap technology companies, the UK market proved comparatively resilient as volatility elsewhere increased. Encouraging corporate earnings releases on both sides of the Channel also provided support, reinforcing confidence in the region’s earnings outlook.

In Asia, attention was firmly focused on the semiconductor sector, where sharp swings in memory-related stocks drove significant market volatility. Korea was particularly affected, with local equities suffering a steep three-day sell-off before rebounding strongly on Friday following positive earnings updates from major technology firms including Amazon and Microsoft, which helped improve sentiment towards the broader AI supply chain. Japanese and Chinese equities were also caught up in the volatility. The Nikkei 225 ultimately finished the week -0.4% lower (in yen terms), while the Shanghai Composite gained +0.5% (in renminbi terms), supported by modest strength in domestic technology shares.

¹ T. Rowe Price – Global Markers Weekly Update, 31/07/2026

The Week Ahead

Country		Period	Actual	Forecast	Previous
UK	Bank of England Monetary Policy Committee Meeting	July	-	-	-
	Bank of England Money & Credit Report	June	-	-	-
	National House Price Index YoY	June	1.80%	1.90%	2.20%
US	Durable Good Orders MoM	June	0.30%	2.40%	-4.50%
	Federal Reserve Monetary Policy Meeting	July	-	-	-
	GDP QoQ	Q2'26	1.50%	2.10%	2.10%
Europe	Flash Consumer Price Index Inflation YoY	July	2.90%	2.90%	2.80%
	GDP QoQ	Q2'26	0.40%	0.20%	-0.20%
	Unemployment Rate	June	6.30%	6.20%	6.20%
Japan	Bank of Japan Monetary Policy Meeting	July	-	-	-
	Industrial Production YoY	June	2.40%	-	0.80%
	Retail Sales YoY	June	0.50%	3.10%	5.30%
	Unemployment Rate	June	2.50%	2.50%	2.50%
China	Official Manufacturing Purchasing Manager Index	July	49.20	50.00	50.30
Source: Workspace Datastream

The Bank of England left its main interest rate unchanged at 3.75% at its own policy meeting last week². The Monetary Policy Committee (MPC) voted 6-3 in favour of no change, with Megan Greene, Catherine Mann and Huw Pill preferring an immediate 0.25 percentage point increase to 4.0%. The discussion was dominated by the inflationary implications of the continuing conflict in the Middle East and the resulting rise in energy prices. While policymakers acknowledged that headline inflation had fallen to +2.6% and that underlying inflationary pressures, wage growth and labour market conditions continue to soften, they also highlighted the risk that persistently higher energy prices could feed through into wages and broader prices over time. For now, the majority judged that tighter financial conditions and ongoing disinflation justified patience, while emphasising that further policy tightening remains a possibility should signs of second-round inflation effects emerge.

In other news, the latest Nationwide House Price Index suggested the UK housing market remains relatively subdued. Annual house price growth slowed to +1.8% in July, down from +2.2% in June, while prices rose just +0.1% over the month³. Nationwide noted that market activity has softened in recent months against an uncertain economic backdrop, with higher energy prices, geopolitical tensions and volatility in interest rate expectations all weighing on sentiment.

² Bank of England – Monetary Policy Committee Meeting, 30/07/2026
³ Nationwide – House Price Index, July 2026

Whilst the majority of attention was understandably on the Fed, second quarter GDP data was also released in the US last week. The first estimate showed the economy expanding at an annualised rate of +1.5%, a slowdown from +2.1% in the first quarter and below market expectations⁴. While the headline figure points to moderating economic momentum, the details were somewhat more encouraging. Consumer spending accelerated during the quarter and, alongside investment and exports, continued to support growth. However, these gains were partly offset by weaker government spending and a larger drag from imports. Overall, the data suggest that the US economy remains resilient but is losing some momentum as higher interest rates, elevated energy costs and ongoing geopolitical uncertainty begin to weigh on activity.

⁴ Bureau of Economic Analysis - GDP (Advance Estimate), 2nd Quarter 2026

In contrast to the softer than expected US GDP data, the Eurozone economy delivered a modest positive surprise. Preliminary figures showed GDP expanding by +0.4% quarter-on-quarter in the second quarter, an acceleration from the flat reading recorded in the Q1’2026 and evidence that economic activity has remained resilient despite higher energy prices⁵. Inflation, however, moved in the opposite direction, with the flash July CPI estimate rising to +2.9%, up from +2.8% in June⁶. The increase was largely driven by energy costs, where annual inflation accelerated to +10.0%, highlighting the impact of renewed tensions in the Middle East. Meanwhile, the labour market remained broadly stable, with the Eurozone unemployment rate holding at 6.3% in June⁷.

⁵ Eurostat – GDP, Q2’2026
⁶ Eurostat – Flash Consumer Price Index Inflation, July 2026
⁷ Eurostat – Unemployment, June 2026

Rounding out a busy week for central banks, the Bank of Japan elected to leave interest rates unchanged at 1.0% at its own policy meeting last week⁸. However, the decision was not unanimous, with the vote split 8-1 and board member Hajime Takata calling for an immediate increase to 1.25%. Importantly, the BoJ struck a relatively hawkish tone, warning that core inflation is likely to move above its 2.0% target later this year as higher energy prices, wage growth and yen weakness feed through to the economy.

In terms of data, several prints from last week painted a mixed picture of the current state of the economy. Retail sales increased by just +0.5% year-on-year in June, a sharp slowdown from May’s +5.0% growth rate and well below expectations, suggesting consumer spending is losing momentum as households contend with higher living costs and a more uncertain economic backdrop⁹. The weak reading was accompanied by a sizeable month-on-month decline. In contrast, the labour market continued to display resilience. The unemployment rate remained unchanged at 2.5% in June, matching expectations and remaining close to its lowest level in a year¹⁰. While employment levels softened modestly, labour demand remained relatively robust, highlighting the tight conditions that continue to support wage growth.

⁸ Bank of Japan – Monetary Policy Meeting, 30/07/2026
⁹ Ministry of Economy, Trade and Industry – Preliminary Report on the Current Survey of Commerce, June 2026
¹⁰ Statistics Bureau of Japan – Labour Force Survey, June 2026

The official manufacturing purchasing manager index (PMI) retreated back into contractionary territory last month, the index slipping from 50.3 to 49.2¹¹. It was the first deterioration in factory activity since February with weak domestic demand, softer export orders and elevated production costs all weighing on the sector. New orders and overall output also slipped back during the month.

¹¹ China Federation of Logistics & Purchasing – PMI Report on China Manufacturing, July 2026

SJP Approved: 03/08/2026

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