Macroeconomic and Geopolitical Developments

The global economy in August displayed resilience, yet divergences across regions were stark. In the United States, growth surprised to the upside. Second-quarter GDP was revised up to 3.3% annualized, supported by robust consumption and a decline in imports. This momentum persisted despite a softer labor market, with July job creation missing expectations. Europe remained near stall-speed, as euro-area GDP expanded just 0.1% quarter-on-quarter. Weak manufacturing and fading exports weighed heavily, though earlier front-loaded shipments ahead of tariffs had offered a temporary boost. China continued to report growth near its 5% target but showed clear signs of cooling: retail sales and factory output fell in July, and bank lending contracted for the first time in two decades. India maintained strong expansion but faced headwinds from U.S. trade actions, while Brazil’s outlook softened. Overall, global business surveys suggested modest expansion, with services driving gains but manufacturing still in contraction.

Inflation trends largely improved. U.S. headline CPI hovered in the mid-2% range, consistent with the Federal Reserve’s target, while core inflation remained around 3%. Euro-area inflation fell to 2.1% in August, effectively at goal, with core measures moderating as energy costs eased. In the United Kingdom, inflation slowed but remained elevated at 3.8%. China flirted with outright deflation as consumer prices stagnated and producer prices declined. This combination of easing inflation in the West and weak prices in Asia gave central banks scope to step back from tightening.

In monetary policy, central banks walked a careful line. The Federal Reserve did not meet in August but Chair Jerome Powell used the Jackson Hole forum to highlight progress on inflation and signal readiness to support growth if needed. Futures markets increasingly priced a September cut, though December remains more likely. The funds rate, held at 4.25–4.50%, is now widely seen as the peak, with easing expected into 2026. Political interference complicated the picture, as the White House pressed for deeper cuts and criticized Fed leadership, raising concerns about central bank independence.

The European Central Bank has already reversed about half of its pandemic-era hikes, bringing the deposit rate down to 2%. With inflation at target, the ECB struck a cautious tone, emphasizing a data-dependent pause rather than committing to further cuts. Risks from tariffs, exchange-rate strength, and oil prices keep policymakers vigilant. The Bank of Japan permitted yields to edge higher, with the 10-year JGB reaching 1.6%, while reiterating its commitment to accommodative policy until inflation stabilizes above 2%. China’s central bank kept its benchmark lending rates unchanged for a third month, preferring targeted subsidies and liquidity support over broad cuts, even as growth data softened. Elsewhere, the Reserve Bank of Australia trimmed rates, and several emerging-market central banks pivoted toward easing. Taken together, these moves confirm that the synchronized tightening cycle of 2022–2023 has ended, and the conversation has shifted toward the timing and pace of accommodation.

Bond markets absorbed these developments with significant volatility. In the United States, the yield curve steepened further. The 10-year Treasury touched 4.34% mid-month, its highest level this year, before ending near 4.2%. The 2-year yield settled around 3.6%, below the 10-year, marking the first sustained end to curve inversion in two years. Investors interpreted this as a sign recession risks have eased and that policy easing lies ahead. Long yields, however, reflect growing concerns about U.S. fiscal deficits and heavy Treasury issuance. In Europe, Bund yields rose to 2.7%, while spreads widened, with France–Germany at its widest in eight months. U.K. gilt yields climbed to 4.7% as stubborn inflation complicated the Bank of England’s path. Credit markets remained orderly, with corporate spreads stable, suggesting confidence in fundamentals despite higher sovereign yields.

The U.S. dollar weakened further, extending a decline that has made it the year’s worst-performing major currency. The dollar index traded near 97–98 at month-end, roughly 10% lower year-to-date. Narrower interest differentials, persistent fiscal uncertainty, and White House pressure on the Fed have undermined the dollar’s support. The euro gained toward 1.18, gold held firm around $2,000 as a diversifier, and emerging-market currencies benefitted from easier conditions. While the trade remains crowded, the consensus view is that the dollar will remain under pressure unless U.S. inflation or policy surprises reverse sentiment.

Geopolitics injected new uncertainty. On August 7, Washington imposed a 25% tariff on Indian imports, with a second 25% threatened later in the month. The move, tied explicitly to India’s Russian oil purchases, represented the sharpest U.S.–India trade rift in decades. Markets reacted warily but expected eventual negotiation given the strategic stakes. On August 15, President Trump met President Putin in Anchorage for a highly publicized summit. The talks ended without agreement on Ukraine, leaving the war unresolved but underscoring Russia’s continued leverage. European leaders emphasized Ukraine must be included in any settlement and pledged continued support. The lack of progress confirmed ongoing energy, defense, and agricultural market risks tied to the conflict.

In the Asia-Pacific, Australia signed the A$500 million Nakamal Agreement with Vanuatu, strengthening economic and security ties as part of efforts to counter China’s influence in the Pacific. Parallel initiatives within the Quad advanced defense and technology cooperation, and Japan deepened partnerships with India on defense production. These moves are reshaping supply chains, trade flows, and strategic investment patterns across the region.

Sectoral effects were notable. Energy markets balanced growth concerns against supply uncertainty, leaving Brent crude in the $80–85 range. Industrial metals softened on China’s slowdown. Defense contractors maintained order backlogs on the back of heightened military spending. Technology supply chains remained in focus as U.S. authorities tightened enforcement of semiconductor export controls, underscoring the strategic role of chips and raising compliance risks for global tech firms.

Taken together, August highlighted an important transition. Inflation is easing, opening space for central banks to pivot. Bond markets are recalibrating to higher issuance and a fading inversion. The dollar is weakening, altering capital flows and commodity dynamics. Meanwhile, trade conflicts and alliances demonstrate that economics and geopolitics are inseparable. The global system is entering a new phase characterized by moderated inflation, heavy fiscal demands, and shifting geopolitical blocs. For investors, this environment demands vigilance, diversification, and readiness to adapt as policy, politics, and markets continue to move in tandem.