The Davy Digest - 18th August 2025

Last week, bond markets in the US stepped up their bets on a rate cut at the Federal Reserve’s next meeting. The market initially implied that a 0.5% cut was likely, however these expectations were pared back to a 90% chance of a 0.25% cut, with an additional cut before year end. Volatility in rates expectations was driven by investors scrutinising inflation data for evidence of tariff impacts. Consumer Price Inflation (CPI) headline figures came in moderately in-line with expectations while the Producer Price Index (PPI) showed a sharp acceleration in wholesale prices in July. The prospect of a faster reduction in interest rates led the S&P 500 to new all-time highs, while rate-sensitive small-cap stocks also rallied.

Europe also had a strong week, with equity indices finishing higher and the euro strengthening against the dollar. Thursday’s industrial production release was the major datapoint in the bloc, which showed a worse-than-expected slump in activity. In the United Kingdom, news flow was mixed. In Tuesday’s jobs report, employment fell for the sixth straight month, while Thursday’s Q2 GDP growth figure came in above consensus at +0.3% quarter-on-quarter. Finally, in Japan, second quarter GDP was stronger than expected.

Last week's highlights

	US Inflation (CPI) (12/08) – Remained unchanged at 2.7% year-on-year. US Producer Price Index (15/08) – Rose 0.9% month-on-month in July, much more than expected. Michigan Consumer Sentiment (15/08) – Fell for the first time since April.
	Eurozone ZEW Sentiment (12/08) – Fell by more than expected to 25.1 in August vs 36.1 previously. Eurozone Industrial Production (14/08) – Fell by 1.3% month-on-month in June.
	UK Unemployment Rate (12/08) – Remains steady at 4.7% in the three months to June. UK GDP (14/08) – Rose 0.3% in Q2, stronger than expected but falling short of 0.7% growth in Q1.
	Australia Interest Rate Decision (12/08) – Cut rates by 25bps to 3.6%. Japan GDP (15/08) – Expanded by 0.3% in Q2, faster than expected. China Retail Sales (15/08) & Industrial Production (15/08) – Factory output slowed to an eight-month low in July, while retail sales weakened.

This week’s headline event will be in Jackson Hole, Wyoming, where the Federal Reserve will be gathering for their annual policy symposium. Chair Jerome Powell’s speech will be closely monitored for signals as to the Fed’s view on balancing between slowing growth and rising inflationary impulses, as well as the forward path of interest rates. Additionally, estimates of Purchasing Manager Index surveys will be released for the US, UK, and Europe. Elsewhere, in Japan, inflation data for July will be out on Thursday.

What's on the radar

	FOMC Minutes (20/08) S&P Global Manufacturing & Services PMIs (21/08) Chair Powell’s Jackson Hole closing speech (22/08)
	Eurozone HCOB Manufacturing & Services PMIs (21/08) Germany HCOB Manufacturing & Services PMIs (21/08)
	UK Inflation (CPI) (20/08) S&P Global Manufacturing & Services PMIs (21/08) UK Retail Sales (22/08)
	Japan Inflation Rate (22/08)

Chart of the moment - Don't look back in anger

Source: US Bureau of Economic Analysis, European Central Bank. GDP = Gross Domestic Product. 

• Despite extreme market volatility and policy uncertainty, corporate earnings continued to climb over the first half of the year. 
• Q2 has so far delivered nearly 12% growth – marking the third consecutive quarter of double-digit gains and putting full-year S&P 500 earnings on track to exceed US$300 per share.
• Market conditions remain supportive, with falling interest rates, robust earnings projections, and stock buybacks that are expected to surpass US$1 trillion annually.
• We remain constructive on equities given the strong earnings momentum while pro-growth policies, fiscal expansion, and deregulation are helping to provide economic tailwinds.

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