August was dominated by turmoil in global bond markets. Rising government borrowing costs in the US prompted an extraordinary intervention by the US Treasury, while Fed Chairman Kevin Warsh used his first Jackson Hole speech to warn that inflation remains too high. In the UK, CPI rose to 2.9%, and Ofgem confirmed a further rise in the energy price cap from October. The FTSE 100 proved resilient, trading close to the 10,900 level by the end of the month. Against this backdrop, attention is now turning firmly to the Chancellor’s first Budget on 28 October.
UK Policy
In August, the Bank of England (BoE) did not meet to decide on the base rate. The July decision to hold it at 3.75% still stands, and the next MPC (Monetary Policy Committee) meeting is expected in mid-September.
However, the MPC dissenters in July may now feel vindicated in light of recent inflation data. The CPI (Consumer Price Index) rose by 2.9% in July, up from 2.6% in June. A big driver was rising energy prices, with Ofgem increasing the energy price cap by 13%. Gas prices rose 14.7% in July – the biggest surge since October 2022, when the Russian invasion of Ukraine sparked an international energy crisis.
Ofgem has announced that households can expect a further 4% rise from 1 October. This would take the annual cost for a typical dual-fuel household from £1,663 to £1,723. This is unlikely to alleviate the UK’s record-level energy debt, which now stands at around £6 billion.
Markets are now shifting their expectations for the second half of 2026 in light of the August data. Interest rate swaps now price in two and possibly three quarter-point rate rises over the next twelve months. The September MPC meeting will be closely watched for any shift in tone, particularly after hawkish comments from Chairman Warsh (head of the US Federal Reserve). Any rise in interest rates across the Atlantic could have knock-on effects on the UK.
UK Economy
The most recent ONS data show the UK grew by 0.4% in Q2 2026, following a 0.6% rise in GDP in the previous quarter. Services output was the main driver of growth, rising 0.5%.
On a year-on-year basis, GDP was 1.2% higher than in Q2 2025. The new Chancellor, John Healey, will likely be encouraged by these figures. However, some economists have warned that the rest of 2026 could be more challenging for growth – especially if rising energy costs and inflation weigh more heavily on households.
The April–June labour market data showed UK unemployment at 4.9%, down 0.1 percentage points on the previous quarter. Payrolled employment fell by 37,000 over the quarter, while the monthly estimate for June was 13,000 lower than in May.
Market sentiment is also being swayed by the UK’s fiscal position – especially in light of government borrowing. The ten-year gilt yield stood at approximately 5.07% towards the end of August, while the thirty-year yield exceeded 5.80% at points. Ten-year borrowing costs were around levels last seen during the global financial crisis, while thirty-year yields approached levels not seen since the late 1990s. With the Budget set for 28 October, bond markets will be the key test of investor confidence in the government’s fiscal plans.
UK Market
The FTSE 100 ended August at around 10,818, having traded between roughly 10,700 and just under 10,960 during the month. The index also recorded a six-session winning streak in the second half of August.
Once again, the Strait of Hormuz drove UK energy stock volatility. There was temporary hope of a diplomatic resolution during the Iran-Oman talks, which led to a fall in oil prices, weighing down on BP and Shell. However, when the talks collapsed, crude recovered, and energy names rallied. This push and pull defined much of the month.
The FTSE 100’s relatively low exposure to technology continued to insulate the UK market from the valuation pressures being felt in the US. International interest in UK equities has grown as investors look for diversification away from tech-heavy indices. The London market continues to attract takeover approaches, adding further evidence of perceived undervaluation but also contributing to a shrinking listed market.
Global Outlook
The bond market heavily defined the global news cycle in August. US government debt surpassed $40 trillion, and the thirty-year Treasury yield hit 5.34% (its highest level since 2007).
Treasury Secretary Scott Bessent announced an immediate doubling of the government’s debt buyback operations on 19 August, targeting longer-dated bonds. Yields fell sharply on the day but rebounded within twenty-four hours. The market, it seemed, was sceptical about whether intervention alone could address the US’s underlying fiscal dynamics.
The volatility was further exacerbated by the US-Canada trade relationship, which appeared to deteriorate further. President Trump imposed a 50% tariff on $20 billion of Canadian goods after a trade deal collapsed. Canada now faces a further threat of 50% tariffs on its vehicles, trucks and auto parts from January 2027. Canada retaliated with its own measures, adding uncertainty to global supply chains and consumer prices.
At Jackson Hole, Fed Chairman Warsh delivered a noticeably hawkish tone – warning that underlying inflation trends had not meaningfully improved. He recommitted to the 2% target, and markets responded by pricing in a roughly 60% probability of a quarter-point rate hike at the September Fed meeting. This puts the Fed on a potential collision course with the Treasury’s efforts to suppress long-term yields.
In Japan, the yen fell to around 164 against the US dollar before an unusual joint US-Japan intervention pushed it back to approximately 155. The rally was short-lived; the yen quickly weakened back towards 159, with investors using the strength as an opportunity to re-enter carry trades. The Bank of Japan’s rate stands at 1.0%, its highest since 1995, but the yield gap with the US remains wide.
August was also partly defined by China’s economic slowdown. July data showed retail sales growing just 0.6% year-on-year, fixed urban investment declining by 6.7% year to date, and industrial output expanding by 4.5%. These figures were all below expectations.
The official manufacturing PMI fell from 50.3 in June to 49.2 in July, moving back into contraction. China’s surveyed urban unemployment rate rose to 5.2% in July, while unemployment among 16–24-year-olds, excluding students, climbed to 17.9%, up from 14.9% in June. Despite strength in electronics and AI-related output, broader demand remains weak and Chinese equities have lagged the wider Asian region.
The content in this article was correct on 04/09/2026.
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