Economy

We see potential upside in August inflation readings, which should stay elevated in the near to medium term. Key drivers are higher energy prices and the recent rise in agricultural commodities: sugar is up 20% year to date and wheat more than 30%. Eurozone inflation for August stood at 3.3%, up from 2.9%, with the average Brent price up 4.6% during the month. Inflation risks often prompt a hawkish stance, meaning higher-for-longer rates and tighter financial conditions.

With inflation risks skewed to the upside, the monetary policy outlook remains neutral to hawkish, with a possible rate hike during the remainder of 2026. With key central banks meeting in September we expect a hold as policymakers focus on forward-looking inflation and employment data, although the rise in Eurozone inflation makes a case for a 25bps hike by the ECB while the labour market remains steady. An improved geopolitical situation would allow a neutral to supportive policy stance.

Hawkish policy, persistent inflation and the geopolitical backdrop together support higher bond yields, and investors can expect a sustained period of elevated yields in the near to medium term. In equities the primary uptrend remains intact, but expect increased volatility with periods of decline: attractive yields can prompt asset reallocation in institutional portfolios, while higher-for-longer rates weigh on earnings through the cost of debt, consumer spending and valuations.