As has frequently been the case in recent years, central banks were the centre of attention in August. Although in the United States it was not the type of attention that the Federal Reserve, or ‘Fed’, is comfortable with, as President Trump loomed large over the most important institution in global finance.

From an economic standpoint, the month got off to a rough start in the US. Payroll data showed weaker than expected job growth, and the revisions to previous months’ data were negative enough that Trump decided to shoot the messenger and fire the head of the BLS (Bureau of Labor Statistics). Core consumer inflation rose to 3.1%, and wholesale prices saw their biggest jump since summer 2022, evidence that tariffs were impacting prices. Markets were focused on Fed Chair Jerome Powell at the annual central bank conference at Jackson Hole in Wyoming, and he did not disappoint. Despite inflation remaining above the 2% target, he acknowledged that the downside risk to jobs was rising, giving the impression that he would be open to lowering the interest rate at the next Fed meeting in September. This wasn’t enough for Trump who upped the pressure on the Fed by moving to fire one of their board of governors for alleged mortgage fraud.

There were also unusual scenes at the Bank of England (BOE), where the monetary policy committee had to vote twice to cut Pound rates to 4%. The second vote was still a tight 5-4 split. The GDP1 report for Q2 did show higher growth for the United Kingdom than expected, but it was still only 0.3%. At the same time UK consumer inflation rose to 3.8%, including 5% for services, which will make it tough for the BOE to move much further any time soon. There were no meetings for the European Central Bank (ECB) in August, but inflation in the Eurozone was stable at 2%, while retail sales rose more than expected. The picture was mixed across the region though, as the new government in Germany has yet to lift growth and France struggles to pass another budget. In a worrying sign for the French government, their bond yields are now at the same level as Italy and even Greece, as illustrated in figure 1.

Further afield, consumer inflation in Japan remains above target, raising expectations for another rate hike, while prices in China continue to stagnate as consumers and businesses remain cautious on spending.

Figure 1: 10-year government bond yields in France, Italy and Greece

Source: Bloomberg. All bond yields are in Euro.

Global bond yields reflected shifting economic expectations in August. The prospect of Fed rates cuts led to lower bond yields in the US, while fiscal and inflation concerns led to higher yields in the Eurozone and UK. Given the size of the US market, falling yields there led to positive overall returns for the global bond index. After appreciating by over 3% in July, the US dollar reversed course in August, with the euro going from 1.14 back close to 1.17 and the pound going from 1.32 to just below 1.35. Lower US yields and a weaker dollar helped gold to end the month at another all-time high (dollar) price of almost US$3,450 / oz. Lastly, after the excitement of the GENIUS2 Act in July, crypto assets cooled off in August, with bitcoin finishing the month down 11% from its recent high.

Stock markets continued their summer run, with the global index up 2.5% in dollar terms – euro and pound investors were up only slightly. But underneath the headline index, there was a notable shift in performance. On a regional basis, the US and Europe lagged Japan in developed markets, while China A (the onshore market) registered a double-digit return on the month. On a sectoral level, materials led the pack. Tech stocks were hurt by comments from Sam Altman, the founder of OpenAI, and a critical report from MIT3 on the benefits of AI (artificial intelligence). On a more positive note, August saw a bounce in healthcare, this year’s worst performing sector, after Warren Buffet bought into the struggling United Health stock. At the end of the month, we got the Q2 earnings report from Nvidia, the super-star AI chipmaker. Even though they beat consensus forecasts and grew revenue by over 50% from last year, traders were a little underwhelmed and concerned by the US-China political risks to future sales.

Although it dipped a little on the last day, the US stock market reached another all-time high in August, despite the softening economic data. While this has raised concerns that markets are out of touch with reality, we note that Q2 earnings season delivered nearly 12% growth (year-on-year), which was the 3rd consecutive quarter of double-digit profit growth. While the ratio of price to earnings in the US is well above average levels, the growth in corporate earnings has been well above average too (see figure 2).

Figure 2: Growth in the US index price and earnings

Source: Bloomberg, Standard & Poors. The S&P 500 index price and earnings are in US dollars.

1 GDP is gross domestic product, the standard measure of economic activity.

2 The GENIUS (Guiding and Establishing National Innovation for US Stablecoins) Act is a new US law that establishes a regulatory framework for stablecoins, which are cryptocurrencies that are meant to hold a stable value relative to a traditional currency, usually the US dollar.

3 Researchers from the Massachusetts Institute of Technology reported that 95% of organisations are getting zero return from their investments in generative AI.