Hedge funds now occupy a record position in the enormous U.S. Treasury market. At the end of 2025, their cash Treasury holdings had reached around $2 trillion, equivalent to roughly 7% of the $28.9 trillion marketable Treasury market.
More broadly, the Federal Reserve reportedly estimates that large hedge funds had gross Treasury exposures of about $4 trillion by September 2025. Office of Financial Research
At first glance, this is not necessarily bad news. Hedge funds provide liquidity and help absorb some of the huge volume of government debt being issued. Their trading strategies can also improve pricing between Treasury securities and futures.
The potential problem is leverage
Much of the activity involves the so-called basis trade: hedge funds buy Treasury securities while simultaneously selling Treasury futures, attempting to profit from tiny price differences.
As those differences are small, the positions can be heavily leveraged, often using borrowed money through the repo market.
The Federal Reserve has reportedly warned that the combination of scale, concentration and leverage could create systemic stress if several strategies come under pressure simultaneously. Federal Reserve
That matters because Treasury markets sit at the heart of global finance.
Caution
If Treasury prices suddenly fall and funding conditions tighten, leveraged funds can face margin calls. They may then be forced to sell assets quickly.
A disorderly unwind could push Treasury yields higher, increase borrowing costs and potentially spill over into equities and other markets.
There are already signs of caution. Morgan Stanley reportedly estimates that assets involved in leveraged Treasury basis trades have fallen around 20% this year to $1.2 trillion.
Time to worry?
So should traders, investors and borrowers be worried? Concerned, yes; panicking, no. The important issue is not simply that hedge funds own more Treasuries.
It is the amount of leverage behind those positions and what happens if everyone tries to exit at the same time.
With Treasury yields already rising sharply, that is a risk worth watching closely
U.S. inflation accelerated in September 2026, raising fresh concerns that the Federal Reserve may struggle to bring price increases under control without keeping interest rates higher for longer.
CPI
The Consumer Price Index (CPI) rose by 3.7% over the year to September, up from 3.4% in August. Monthly inflation reached 0.6%, driven largely by a sharp 9.1% increase in petrol prices. Core CPI, which excludes food and energy, rose by 2.6% annually.
The figures highlight the growing threat from rising energy costs, which can feed through into transport, manufacturing and household bills, putting further pressure on consumers.
Core PCE, excluding food and energy, stood at 3.0%. Monthly increases were 0.3% and 0.2%, respectively.
Both measures remain above the Fed’s 2% inflation target, complicating decisions over interest rates. Renewed inflationary pressure could delay rate cuts or increase the prospect of further tightening.
For financial markets, the combination of stubborn inflation, rising energy prices and elevated borrowing costs presents a challenging outlook.
Investors will be watching the next PCE figures, due on 29th October 2026, for clues about the direction of U.S. monetary policy.
The latest U.S. non-farm payroll figures have delivered a significant downside surprise, with employers adding just 29,000 jobs in September 2026, well below economists’ expectations.
The unemployment rate also edged higher to 4.2%, while payroll growth for July and August 2026 was revised down by a combined 60,000 jobs.
Wage growth provided another important signal, with average hourly earnings rising just 0.1% in September 2026 and 3.0% over the past year.
Construction added 11,000 jobs and manufacturing 9,000, while healthcare continued to record employment gains.
Federal Reserve Decision?
For the Federal Reserve, the report strengthens the case for caution on further interest-rate increases.
The Fed raised its benchmark rate by 25 basis points in September 2026 to a 3.75%-4.00% range, but policymakers have continued to face a difficult balance between controlling inflation and maintaining maximum employment.
The weak payroll number, higher unemployment and softer wage growth reduce evidence of an overheating labour market.
Market expectations for another U.S. rate increase at the Fed’s October meeting fell sharply following the release, although U.S. inflation remains the key obstacle to any immediate easing in policy.
The report therefore leaves the Fed with a more delicate policy trade-off: employment is losing momentum, but inflation remains too important to ignore.
Annual headline PCE inflation stood at 3.4%, while core PCE inflation, which excludes food and energy, remained at 3.0%.
Despite the encouraging monthly figures, inflation remains well above the Fed’s 2% target. Persistent price pressures, rising energy costs and resilient consumer spending could complicate the outlook.
The latest data may give policymakers some breathing space, but it does not guarantee interest-rate cuts.
The Fed must balance the need to control inflation against the risk of weakening economic growth, leaving the timing of future rate decisions uncertain.
The combination of record global debt, higher borrowing costs and growing doubts about the enormous sums being committed to artificial intelligence is creating a more complicated backdrop for financial markets.
Global debt exceeded $365 trillion in the first half of 2026, according to the Institute of International Finance, with debt now around 310% of global GDP.
China and the U.S. debt mountain
The increase was driven particularly by China and the United States. At the same time, higher interest rates are making refinancing increasingly expensive, creating the possibility of a vicious cycle in which governments and companies borrow more simply to service existing obligations.
This is particularly significant for the AI boom. The OECD says governments and companies are expected to borrow around $29 trillion from markets during 2026, while corporate borrowing is also rising as businesses finance major investment programmes, including AI infrastructure.
Michael Burry
Michael Burry, famous for anticipating the U.S. housing crisis, has added another warning sign.
He has recently reportedly increased bearish positions involving Micron, Palantir, Nebius and the semiconductor sector, arguing that parts of the AI and chip boom could be vulnerable if supply increases faster than demand.
The concern is not necessarily that AI will fail. Rather, enormous investment and borrowing require enormous future revenues to justify them.
If AI spending produces lower-than-expected returns, highly valued technology shares could face pressure at the same time as heavily indebted companies face rising financing costs.
Could this affect the stock market now?
The ingredients for greater volatility are certainly present. Higher bond yields, expensive energy, inflation pressures and debt-servicing costs can compete with equities for investors’ money.
Reuters recently reported that global borrowing costs and energy prices were already creating concerns about the potential impact on equities and credit markets.
Yet markets have so far remained remarkably resilient, with U.S. shares still close to record levels.
The danger, therefore, may not be debt alone, but…
debt + high valuations + expensive AI investment + higher interest rates.
If those pressures reinforce one another, the adjustment in markets could become considerably more significant.
Stock markets are continuing to climb despite a growing list of concerns that would normally be expected to unsettle investors.
Interest rates are higher, government bond yields have risen, oil prices are elevated and inflation remains a concern. Geopolitical tensions are also creating uncertainty. Tariffs still on the agenda. Global debt rising and rogue AI concerns.
Yet investors continue to buy shares, particularly in the United States.
So why?
One important reason is corporate earnings. Investors appear willing to tolerate higher interest rates and expensive valuations while they believe company profits will continue to grow.
Large technology companies, in particular, remain at the centre of this optimism, with huge investment in artificial intelligence fuelling expectations of strong future earnings.
Buying dips
Another factor is the willingness of investors to buy market dips. When share prices fall, investors who remain confident about the longer-term outlook see an opportunity to buy at cheaper prices.
This can create a self-reinforcing cycle: markets fall, buyers move in, confidence returns and prices rise again.
There is also a belief that the economy remains sufficiently resilient to withstand higher borrowing costs and expensive energy.
Bad news is therefore being viewed as a problem, but not necessarily one capable of seriously damaging corporate profits.
However, this resilience could eventually be tested.
Earnings faith
The market is currently placing considerable faith in continued earnings growth and the economic benefits of artificial intelligence. If either begins to disappoint, investors could reassess the high valuations attached to many shares.
Higher oil prices could also keep inflation elevated, forcing interest rates to remain higher for longer. Rising bond yields would then provide investors with an increasingly attractive alternative to shares.
Bull Bear
For now, the bulls remain in control of market prices, even though the bears have plenty of arguments on their side.
The important question is whether company profits can continue to justify today’s share prices.
If they can, markets may continue climbing despite the bad news. If they cannot, investors may suddenly start paying much closer attention to all those warning signs they have recently been ignoring.
Britain’s fiscal squeeze is becoming increasingly difficult to ignore. The yield on the UK’s 30-year gilt has climbed to 5.89% — its highest level since 1998 — while the 10-year yield has risen to around 5.25%.
The immediate trigger is largely global: higher oil prices, renewed inflation fears and a worldwide bond sell-off. But Britain has an additional problem: an already stretched public finances position.
Tax, borrow or austerity – the familiar story
The timing could hardly be worse. Higher gilt yields mean higher future borrowing costs and, importantly, higher projected debt-interest payments.
Current estimates suggest that the rise in yields could roughly halve the Chancellor’s fiscal headroom, from around £26bn to about £13.8bn.
That leaves the government with an increasingly familiar choice: raise taxes, restrain spending, borrow more — or accept another round of austerity.
Burgeoning welfare
Welfare is inevitably part of the debate. UK welfare spending is enormous, projected at around £353bn in 2026-27, although more than half goes towards pensioners and the State Pension rather than working-age benefits.
The working-age and health-related components are nevertheless growing rapidly, creating a genuine long-term fiscal challenge.
But blaming welfare alone would be misleading. Debt interest itself has become a major burden. Public-sector net debt was around 95% of GDP in mid-2026, while debt-interest costs have been among their highest levels for decades.
The circle of failure
This is the vicious circle facing Britain: slow growth limits tax revenues; high spending increases borrowing; higher borrowing costs increase debt interest; and higher interest costs leave less money for public services and investment.
So is austerity coming back? Perhaps it never really left. The difference now is that governments are attempting to squeeze an increasingly expensive state while simultaneously trying to protect living standards and stimulate growth.
The October 2026 Budget may therefore be less about political ambition and more about how much pain the bond market will allow Britain to avoid.
Servicing debt
Borrowing costs in the U.S., Japan and Europe have hit similar highs in recent days, reflecting investors’ concerns about inflation, state borrowing levels and spending levels by large tech companies on AI.
World debt is a growing problem too
To be fair, rising yields and higher debt levels are not just a UK problem. France has its share of the burden, Japan, the EU and the U.S. too.
Inflation has returned as an unwelcome problem for Europe, with eurozone consumer prices rising by 3.3% in August 2026, according to Eurostat’s latest flash estimate.
That was a significant increase from 2.9% in July 2026 and puts inflation well above the European Central Bank’s 2% target.
Energy inflation up
The main culprit is energy. Annual energy inflation surged to 14.3%, up from 10.3% a month earlier, highlighting how quickly geopolitical tensions and energy markets can feed through into household bills and business costs.
There was, however, some better news beneath the headline figure. Services inflation eased to 3.0% from 3.30%, suggesting some underlying price pressures may be cooling.
Room for interest increase
The problem for the ECB is timing. Interest rates are already relatively low, but renewed inflation makes further cuts harder to justify.
Europe could therefore face an uncomfortable combination of higher prices and weaker growth — the very conditions policymakers would rather avoid.
France is facing growing pressure from financial markets as the cost of servicing its enormous public debt continues to rise.
The problem is not simply the size of the debt, but the combination of high borrowing requirements, weak economic growth, political uncertainty and increasingly expensive interest payments.
France’s debt
France’s public debt is expected to reach around 118% of GDP in 2026, rising above 120% in 2027, according to the European Commission.
Meanwhile, the budget deficit is forecast to remain at around 5.1% of GDP this year, well above the European Union’s 3% limit.
Investors are now demanding higher returns to hold French government bonds. The yield on the benchmark 10-year French OAT recently moved above 4%, reaching levels not seen since the late 2000s.
Yields
At the end of August 2026, the yield remained around 4.1%, while the equivalent German Bund was closer to 3.25%.
That difference matters. The wider the gap between French and German borrowing costs, the greater the risk premium investors are demanding from Paris.
France’s spread has recently approached 90 basis points, reflecting concerns over its fiscal position and political uncertainty ahead of next year’s presidential election.
Danger signs
The danger is a potential “debt snowball”. As older, cheaper bonds mature, France must refinance them at today’s higher rates.
Interest payments therefore consume an increasing share of government revenue, potentially forcing Paris to borrow even more.
The European Commission reportedly expects French interest payments to rise from 2.2% of GDP in 2025 to 2.6% in 2026 and 2.8% in 2027.
France is not facing an immediate sovereign default, but markets are clearly demanding greater fiscal discipline.
The crucial question is whether politicians can agree on spending cuts and tax measures before rising interest costs become a much larger problem.
The 2026 annual Jackson Hole meeting has delivered a clear warning to financial markets: U.S. interest rates may not be heading lower… just yet.
Federal Reserve Chair Kevin Warsh used his first major Jackson Hole speech to stress that inflation remains too high and that recent improvements have not been enough to convince policymakers that price pressures are returning sustainably towards the Fed’s 2% target.
Warsh also suggested that current financial conditions are not sufficiently restrictive, raising the possibility that further interest-rate increases could be required.
Interest rate increase more likely?
Markets reacted quickly, with the probability of a September 2026 rate rise climbing to around 60%, compared with roughly 35% before his speech.
The message is particularly significant because investors had been hoping for lower borrowing costs. Instead, attention has shifted towards whether stubborn U.S. inflation will force the Fed to tighten policy again.
With the September 2026 meeting approaching, upcoming inflation and employment figures could prove crucial in determining the next move.
The probability of a summer correction in US equities is high
U.S. stocks have entered the summer with a confident stride, buoyed by softer inflation data and a fresh wave of enthusiasm for AI and Chip linked earnings.
Futures are rising, headlines are upbeat, and investors appear convinced that the worst of the tightening cycle is behind them.
Foundation
Yet beneath the surface, the market’s foundations look increasingly uneven — and that imbalance is precisely what makes a seasonal correction more likely than many expect.
The latest market action shows how sentiment can be shaped by single data points. A “soft inflation reading” has lifted futures, encouraging hopes of a gentler Federal Reserve.
But this sits awkwardly alongside the Fed’s own messaging: Chair Warsh has openly pledged a “regime change” in policy to eliminate the inflation “tax” on households, a stance that hardly suggests imminent easing.
When monetary policy becomes less predictable, equity valuations — especially in tech — become more vulnerable.
Leaders & Losers
At the same time, leadership in the market has narrowed dramatically. AI‑exposed names continue to surge, with ASML jumping more than 7% after raising its sales forecast again.
CrowdStrike, Goldman Sachs and Palo Alto Networks are among the recent biggest movers. Yet the other end of the tape tells a different story: IBM has suffered a record 25% plunge, Biogen is down sharply, and several consumer‑facing names are showing unusual volume on steep declines.
This split between winners and laggards is characteristic of late‑cycle behaviour.
Seasonally, July and August are already the market’s weakest stretch. Liquidity thins, volatility picks up, and geopolitical risks — from Middle East tensions to Europe’s drone‑driven defence pivot — add further instability.
Too Bullish
Even Bank of America warns that investors are “too bullish” heading into summer.
Put together, the picture is clear: optimism may dominate the headlines, but the underlying market structure suggests a correction is not only possible — it is increasingly probable.
What the latest evidence shows
The search results give a very clear picture: market structure is weakening beneath headline highs, and several institutions are openly warning about a summer drawdown.
1. Breadth collapse (the biggest red flag)
Sources show the S&P 500’s rally is being carried by a tiny handful of AI mega‑caps:
Median S&P 500 stock is 13% below its 52‑week high even as the index hits records.
Equal‑weight S&P 500 is down ~1% while the cap‑weighted index is up double digits.
Semiconductors +30%, Magnificent 7 +10%, “everything else on the curb.”
This is classic late‑cycle behaviour. Historically, this level of narrowness precedes larger‑than‑average drawdowns over 6–12 months (Goldman Sachs cited).
2. Technical overextension
Multiple sources highlight:
RSI above 70 for weeks (overbought).
Negative divergence: price makes new highs, RSI makes lower highs — seen at 2018, 2020, 2021 tops.
VIX at long‑term lows and “set up for a bullish swing,” which usually means S&P 500 downside.
3.Seasonality: worst window of the year
Summer (July–August 2026) is historically the weakest period for US equities due to:
Low liquidity
Higher volatility
Higher probability of corrections
This is explicitly flagged in multiple sources.
4.Fed uncertainty
The new Fed Chair (Warsh/Walsh) has taken a hawkish stance, removing forward guidance and signalling possible rate hikes:
Markets now price a 60% chance of a hike in October.
Higher rates → lower valuations → tech most exposed.
Liquidity contraction is also highlighted as the biggest near‑term risk (Morgan Stanley).
5.Institutional forecasts
Bank of America: warns of a 6% summer correction.
MarketBeat: warns of a potential 20% correction in H2 2026 (less consensus and unlikely, but notable).
Real Investment Advice: says risk is “stacking up” with breadth collapse + worst seasonal window + political cycle.
Are we facing a correction?
Yes — the probability is high likely. The convergence of:
collapsing breadth
overbought technicals
seasonal weakness
Fed uncertainty
narrow AI‑driven leadership
…makes a summer correction the base case, not an outlier.
The most credible range is –6% to –10%, with tail‑risk scenarios pointing deeper.
What matters most for the next 4–8 weeks (Summer 2026)
Watch VIX — a spike will confirm the correction.
Watch oil prices — a rebound could reignite inflation and force Fed tightening.
Watch semiconductors — they’re the rally’s spine; any wobble cascades.
U.S. June’s 2026 U.S. inflation report showed an unexpected cooling, with headline CPI dropping 0.4% month‑on‑month and annual inflation easing to 3.5%, driven almost entirely by a steep fall in energy prices.
Core inflation was flat, bringing the yearly core rate down to 2.6%.
Why this report mattered
This was the final major inflation release before the Fed’s late‑July meeting. Markets had expected a softer print, but the scale of the energy‑driven decline surprised forecasters.
The underlying trend (flat core inflation) suggests cooling, but geopolitical risks mean July’s 2026inflation could rebound.
The latest U.S. jobs report underscored a clear cooling in labour market momentum, with June’s 2026 nonfarm payrolls rising by just 57,000, well below economists’ expectations and marking the weakest gain in four months.
And this despite an expected job boost as the U.S. hosts a highly successful record-breaking Football World Cup.
Although the headline unemployment rate dipped to 4.2%, this improvement was largely cosmetic: the labour force participation rate fell to 61.5%, its lowest level since March 2021, meaning fewer people were counted as actively seeking work.
Beneath the surface, the household survey painted a more troubling picture. Employment dropped sharply, with 507,000 fewer people reporting they were at work, and revisions to earlier months erased 74,000 previously reported jobs — undercutting the narrative of springtime strength.
Leisure and hospitality suffered a notable setback, shedding 61,000 positions, while gains were concentrated in a narrow band of sectors: professional and business services (+36,000), social assistance (+25,000), and healthcare (+22,000).
Financial markets reacted cautiously, with investors trimming expectations of a Federal Reserve rate rise in September 2026.
Overall, the data reportedly suggests a labour market losing steam, shaped more by statistical quirks and workforce exits than by genuine economic resilience.
United Kingdom – Latest Data This Week to June 19th 2026
Labour market:
The UK unemployment rate for April 2026 held at 4.9%, slightly below the previous 5% reading. Average earnings including bonuses grew 4.4%, while earnings excluding bonuses rose 3.4%. Employment increased by 100,000 in April, although HMRC payrolls for May showed only a marginal +2,000 change.
Retail sales:
Retail sales rebounded strongly in May 2026, rising 1.2% month‑on‑month and 3.2% year‑on‑year, reversing April’s declines. Retail sales excluding fuel also rose 1.2% MoM and 4.6% YoY.
Public finances:
Public sector net borrowing (excluding banks) came in at £23.3bn in May, slightly worse than April’s revised figure.
Business activity:
Flash PMIs for June show mixed momentum:
Manufacturing PMI: 53.9 (expansion)
Services PMI: 49.3 (contraction)
Composite PMI: 49.7 (borderline contraction) These readings suggest the UK economy is losing some pace heading into summer.
United States – Latest Data This Week to 19th June 2026
Labour market:
Initial jobless claims for the week ending 13th June 2026 fell slightly to 226,000, broadly in line with expectations. Continuing claims rose to 1.81 million, indicating some softening in labour market conditions.
Manufacturing & business surveys:
The Philadelphia Fed Manufacturing Index jumped to 10.3 in June from –0.4, signalling a notable improvement in factory activity.
The S&P Global flash PMIs for June show:
Manufacturing: 55.1 (solid expansion)
Services: 50.7 (modest expansion)
Composite: 51.5 (steady growth) These point to a resilient US private‑sector backdrop.
Housing & consumer indicators:
Mortgage rates eased slightly, with the 30‑year rate dipping to 6.47%.
Redbook retail sales rose 9.4% YoY, suggesting firm consumer spending.
Capital flows & energy:
Net long‑term TIC flows for April registered $103.1bn, indicating strong foreign demand for US assets.
API data showed a sharp –8.33 million barrel draw in crude oil stocks, hinting at tighter near‑term supply.
Overall Pictures for UK and U.S.
UK: A mixed week — labour market steady but softening at the margins; retail sales surprisingly strong; PMIs signalling a mild loss of momentum; public borrowing still elevated.
US: Data broadly stronger — manufacturing rebounded, services steady, jobless claims stable, and consumer spending indicators show firm.
The European Central Bank jolted markets yesterday with its first interest‑rate increase since 2023, a move driven by renewed energy‑price pressures linked to the U.S./Iran conflict.
Policymakers signalled that the surge in wholesale gas and oil costs is feeding back into euro‑area inflation, forcing a return to tightening after more than two years of stability.
Investors had expected a cautious stance, but the ECB argued that delaying action risked inflation becoming embedded again, particularly in energy‑sensitive economies such as Germany and Italy.
The decision pushed bond yields higher across the bloc and strengthened the euro, reflecting expectations of a more hawkish path through the summer.
UK Lacklustre Growth
In the UK, fresh GDP data released by the ONS for April 2026 offered a more mixed picture. The economy expanded modestly, continuing the fragile recovery seen earlier in the year, but underlying momentum remains weak.
Services provided the bulk of the growth, while manufacturing and construction were broadly flat.
Economists warn that higher energy prices — the same shock driving the ECB’s decision — could weigh on UK output in the coming months, squeezing household budgets and raising costs for businesses.
Together, the ECB’s shift and the UK’s tentative growth figures underline how vulnerable Europe remains to global energy disruptions.
The UK’s latest run of economic data has delivered a contradictory picture: inflation easing sharply, borrowing surging, and growth outperforming expectations.
Together, the figures show an economy stabilising in some areas while coming under renewed strain in others.
Inflation (CPI)
April CPI fell to 2.8%, down from 3.3% in March, the lowest rate in nearly three years.
The drop was driven by Ofgem’s April energy price cap, which cut household gas and electricity bills, alongside softer rises in water charges, road tax and several food categories.
But economists warn the relief will be temporary. Wholesale energy prices have risen sharply since the U.S. / Iran conflict escalated, and inflation is expected to climb back above 4% later in the year.
The Bank of England is therefore likely to remain cautious about cutting rates.
Forecast out of sync
Government Borrowing (April 2026) The borrowing picture was far less encouraging. The government borrowed £24.3 billion in April — the highest April figure since 2020 and well above the £20.9 billion forecast by the OBR.
Borrowing was £4.9 billion higher than the same month last year, driven by inflation‑linked increases in benefits, the earnings‑linked rise in the state pension, and record April debt‑interest payments of £10.3 billion in 2026.
Analysts note that this deterioration comes before the full impact of the energy‑price shock is felt, raising concerns about the fiscal outlook for the rest of the year.
Growth
GDP Growth The bright spot came from growth: the economy expanded 0.3% in March 2026, beating expectations of a slight contraction, and delivered 0.6% growth for Q1 — the fastest among G7 countries reporting so far.
However, the ONS highlights that much of March’s strength reflected “front‑loading” of spending ahead of expected price rises linked to the Iran war, suggesting momentum may fade as higher energy and fuel costs feed through.
This data comes as the global economy waits for the full impact of the U.S. / Iran conflict to unravel.
The latest public finance figures show that government borrowing has dropped to a lower‑than‑forecast level, helped by stronger tax receipts and easing inflationary pressures.
While the precise numbers will be scrutinised in the coming days, the headline outcome marks a modest but meaningful improvement in the UK’s fiscal position.
Softer inflation and lower interest rates
Analysts note that softer inflation has reduced the government’s debt‑interest bill, particularly on index‑linked gilts, which had surged during the inflation spike of the past two years.
The fall in borrowing also reflects a stabilising labour market and firmer wage growth, which have supported income‑tax and National Insurance receipts.
At the same time, lower market interest rates — driven by expectations of further Bank of England cuts after recent reductions to 3.75% — have eased short‑term financing costs for the Treasury.
High debt level
However, economists caution that the improvement should not be overstated. UK debt remains historically high, and pressures on public services, welfare spending, and capital investment persist.
Moreover, with growth still subdued and geopolitical risks keeping energy markets volatile, the fiscal outlook remains vulnerable to external shocks.
Even so, today’s figures provide the Chancellor with a welcome narrative shift: after years of deteriorating public finances, the government can point to early signs of stabilisation — albeit from a challenging starting point.
What the real data shows (ONS, published 23rd April 2026)
The latest ONS release confirms that UK government borrowing has indeed come in lower than expected, and the scale of the improvement is now clear:
Annual borrowing: £132.0 billion in the year to March 2026 — £19.8 billion lower than the previous year — £0.7 billion below the OBR forecast — Lowest level since 2022–23
March borrowing: £12.6 billion — £1.4 billion lower than March 2025 — Lowest March figure since 2022
Borrowing as % of GDP: — 4.3%, the lowest since 2019–20
The U.S./ Iran / Israel conflict with undoubtably hold the economy back as the effect has yet to fully filter through.
UK inflation jumped to 3.3% in March 2026, driven primarily by a sharp surge in fuel prices linked to the Iran conflict.
UK inflation accelerated to 3.3% in March 2026, up from 3% in February 2026, marking the first clear evidence of the Iran‑U.S. conflict feeding through to consumer prices.
Fuel costs
Official ONS data shows that motor fuel costs were the dominant driver, with petrol and diesel prices rising at their fastest pace in more than three years as global energy markets reacted to the disruption in the Strait of Hormuz.
Air fares
Air fares also rose sharply, partly due to the early Easter holidays, while food inflation picked up again, including notable increases in sweets and chocolate.
Clothing discounted
Clothing provided the only meaningful offset, with retailers discounting more heavily than last year.
The rise pushes inflation further from the Bank of England’s 2% target and complicates the policy outlook.
While economists expect UK inflation to ease slightly in April 2026, the broader risk is that sustained energy pressures could keep price growth elevated for longer.
After months of gradual easing, the pause reflects a delicate moment for the UK economy, with price pressures beginning to shift beneath the surface.
Clothing was the biggest upward driver, with prices rising this year after falling during the same period in 2025.
This was offset by cheaper petrol, though those figures were captured before the recent surge in global oil prices triggered by the outbreak of war involving Iran.
While inflation is far below the peaks seen a few years ago, households are still contending with the reality that prices continue to rise—just more slowly.
ONS data
The ONS also introduced supermarket scanner data for the first time, offering a more accurate picture of food costs.
Economists warn that the conflict‑driven spike in oil and gas prices could push inflation higher again later in the year, with some forecasts suggesting a potential rise towards 4.6%.
Businesses already reliant on fuel, such as regional bus operators, report steep cost increases that may soon feed through to consumers.
The government insists it is working to ease cost‑of‑living pressures, though global events may limit its room for manoeuvre.
The UK mortgage market has been thrown back into a state of turbulence not seen since the aftermath of the 2022 mini‑Budget, as lenders scramble to reprice deals in response to global instability triggered by the U.S. Israel war with Iran.
Average rates on two‑year fixed mortgages have now climbed above 5%, reaching their highest level since last August, according to data from Moneyfacts. Five‑year fixes have also risen, marking their most expensive point since mid‑2024.
Little or no warning
The sudden shift has caught borrowers off guard. Nearly 500 mortgage products have been withdrawn in just 48 hours, the steepest contraction in available deals since the Truss–Kwarteng fiscal shock.
Lenders are reacting to sharp movements in gilt yields, which have become increasingly volatile as markets reassess the likelihood of Bank of England rate cuts this year.
Before the conflict erupted, investors had broadly expected the Bank to begin easing borrowing costs. That optimism evaporated as oil prices surged, raising the prospect of renewed inflationary pressure.
With Brent crude still more than 20% higher than before the war and reaching over 40% increase at one stage, expectations of cheaper mortgages have been replaced by fears of a prolonged period of elevated rates.
Timing
For homeowners approaching the end of a fixed deal, the timing is particularly painful. The average two‑year fix has jumped from 4.84% to 5.01% in less than four days, while five‑year rates have risen from 4.96% to 5.09%.
First‑time buyers, already squeezed by high prices and stagnant supply, face a shrinking pool of products and rising monthly costs.
The wider cost‑of‑living picture is also darkening. Petrol and diesel prices continue to climb as Middle East supply disruptions ripple through global energy markets.
With inflation risks resurfacing, the path for mortgage rates now hinges on how the conflict evolves — and whether markets can regain their footing.
Fuel up, energy costs up and mortgage rates up – all in just a weekend – that didn’t take long.
U.S. core wholesale prices rose 0.8% in January 2026, a sharper-than-expected acceleration that has renewed concerns about lingering inflationary pressures across the American economy.
The increase, reported by the Bureau of Labor Statistics, exceeded both December 2025’s 0.6% rise and the consensus expectation of 0.3%, marking one of the strongest monthly gains in recent months.
The core U.S. Producer Price Index (PPI), which strips out volatile food and energy components, is closely watched as an indicator of underlying cost pressures faced by businesses.
January’s jump suggests that inflationary forces remain embedded in key service sectors, even as goods prices continue to soften.
Indeed, services were the primary driver of the month’s overall wholesale inflation, with final demand services advancing 0.8%, while goods prices fell by 0.3% amid notable declines in gasoline and several food categories.
Divergence
This divergence between services and goods highlights a structural shift in inflation dynamics. Goods inflation has eased significantly as supply chains normalise and commodity prices stabilise.
By contrast, service-sector inflation—often tied to labour costs, logistics, and profit margins—has proven more persistent.
January 2026’s data underscores this trend, with strong increases in areas such as professional and commercial equipment wholesaling, telecommunications access services, and health and beauty retailing.
Complicates Inflation Outlook
For policymakers, the report complicates the inflation outlook. While headline PPI rose a more modest 0.5%, the strength of the core measure suggests that underlying pressures may not be cooling as quickly as hoped.
Markets had been anticipating a gradual easing that would give the Federal Reserve more confidence to consider rate cuts later in the year.
Instead, the January 2026 figures may reinforce a more cautious stance, particularly if upcoming consumer inflation data echoes the same pattern.
Businesses and consumers alike will be watching February 2026’s data closely to determine whether January represents a temporary spike or the beginning of a more stubborn inflation trend.
The United States economy lost momentum at the end of 2025, with fourth‑quarter GDP rising just 1.4%, a sharp deceleration from the 4.4% expansion recorded in the previous quarter.
The first estimate from the U.S. Bureau of Economic Analysis underscored a cooling backdrop that contrasts with the resilience seen through much of last year.
The slowdown was broad‑based. Government spending, which had previously provided a meaningful lift, swung lower.
Exports weakened
Exports also weakened, reflecting softer global demand and a less favourable trade environment.
Consumer spending — the backbone of the U.S. economy — continued to grow but at a more subdued pace, suggesting households are becoming more cautious as borrowing costs remain elevated. Although there has been some easing in U.S. mortgage rates.
Imports declined, which mechanically supports GDP, but the underlying signal points to softer domestic demand.
Analysts had expected a stronger finish to the year, with forecasts clustered closer to 2.5%.
The miss raises questions about the durability of U.S. growth heading into 2026, particularly as fiscal support fades and the effects of tighter monetary policy continue to filter through.
Q3 surge to Q4 slowdown
The contrast with the previous quarter is stark: Q3’s surge was driven by robust consumer activity, firmer government outlays, and a rebound in exports — dynamics that have since reversed.
Even so, the latest figures do not point to an imminent recession. Investment remains mixed rather than collapsing, and consumer spending is still contributing positively.
But the data does reportedly suggest the economy is entering a more fragile phase, where small shocks could have outsized effects.
For policymakers, the report complicates the Federal Reserve’s path. Inflation has eased but remains above target, and a softer growth profile may strengthen the case for rate cuts later in the year — though officials will want clearer evidence before shifting course.
The UK’s inflation rate has dropped to 3%, its lowest level since March last year, renewing expectations that the Bank of England (BoE) may soon begin cutting interest rates.
The fall, recorded in January, marks a clear reversal from December’s unexpected uptick to 3.4% and reinforces the broader downward trend seen in late 2025.
Economists note that easing petrol, food, and airfare prices have been key contributors to the decline, helping inflation move closer to the government’s 2% target.
Bank of England easier decision
The BoE has held Bank Rate at 3.75% in recent meetings, emphasising the need for confidence that inflation will not only reach 2% but remain there sustainably.
However, with inflation now falling faster than previously forecast, policymakers appear to have greater room to consider loosening monetary policy later this spring.
The Bank itself has acknowledged that inflation is likely to return to target ‘a bit quicker than previously forecast’, suggesting scope for cuts if economic conditions evolve as expected.
Rate reduction likely in March or April 2026
Market analysts increasingly anticipate a rate reduction as early as March or April, particularly as wage growth cools and unemployment edges higher—factors that reduce domestic inflationary pressure.
For households and businesses, a cut would offer welcome relief after two years of elevated borrowing costs, potentially lowering mortgage rates and improving credit conditions.
While the BoE remains cautious, the latest inflation figures strengthen the case for a shift towards easing—signalling that the long, difficult climb down from the inflation peak may finally be nearing its conclusion.
As expected
Most economists and market analysts expected UK inflation to fall back to around 3% in the January release, down from 3.4% in December 2025.
UK inflation falls to 3%
This means the actual figure—3%—came in exactly in line with forecasts, rather than surprising to the downside or upside.
That alignment matters for the Bank of England because it reinforces the sense that inflation is easing broadly as expected, rather than stalling or re‑accelerating.
Employment data
Alongside falling inflation, the Bank of England is closely watching UK labour market data, which remains a key factor in its interest rate decisions.
Recent figures show wage growth is easing, with average earnings excluding bonuses rising at a slower pace—now below 6%—while job vacancies continue to decline.
This softening suggests that domestic inflationary pressure from pay settlements may be waning, giving the Bank more confidence that inflation can return to target sustainably.
However, unemployment remains low, and services inflation is still sticky, meaning policymakers are likely to weigh jobs data carefully before committing to rate cuts.
If wage growth continues to moderate and employment weakens further, the case for easing monetary policy will strengthen.
This marks the second consecutive cut in 2025 amid economic uncertainty and a government data blackout.
In a move aimed at supporting growth, the Federal Reserve reduced its benchmark interest rate by 0.25% following its October policy meeting.
The decision, reportedly backed by a 10–2 vote from the Federal Open Market Committee, reflects growing concern over a weakening labour market and subdued consumer confidence.
Chair Jerome Powell acknowledged the challenges posed by the ongoing U.S. government shutdown, which has delayed key economic reports.
With official data frozen, the Fed relied on private indicators showing a slowdown in hiring and modest inflation. The Consumer Price Index rose just 3% year-on-year, below the Fed’s long-term target.
While the rate cut aims to ease borrowing costs and stimulate investment, Powell cautioned against assuming further reductions in December.
He emphasised that future decisions would depend on incoming data and evolving risks. It is not a done deal.
The Fed also announced plans to end quantitative tightening (QT) by 1st December 2025, signalling a broader shift towards monetary easing.
Markets responded cautiously, with investors weighing the implications for growth, inflation, and the Fed’s credibility.
Markets, after a short rally during the week, were subdued after the announcement.
The latest U.S. inflation figures show a modest increase in consumer prices. The annual rate rose to 3.0% in September 2025, up from 2.9% in August. 2025.
Core inflation—which excludes volatile food and energy prices—also rose by 0.2% in September. This brought the year-on-year rate to 3.0%, again undercutting forecasts of 3.1%.
A notable contributor to the headline figure was a 4.1% surge in petrol prices. This offset declines in other areas such as used vehicles and household furnishings.
Federal Reserve
The data arrives just ahead of the Federal Reserve’s next policy meeting, where a 0.5% rate cut is widely anticipated. Softer inflation readings have buoyed market sentiment, with futures posting gains on hopes of looser monetary policy.
Despite a partial government shutdown, the inflation report was released on schedule, underscoring its significance for financial markets and policymakers.
With inflation now hovering near the Fed’s target, attention turns to wage growth and consumer spending as key indicators of future price stability.
The next CPI update is due mid-November.
This CPI news added to the possibility of a Fed rate cut in conjunction to the possibility of a U.S. China ‘tariff trade’ deal and relaxation of Rare Earth material sales pushed markets to new all-time highs!
It’s one of those classic Wall Street paradoxes—where bad news somehow fuels bullish momentum. What’s going on?
News round-up
S&P 500 closes above 6,700 after rising 0.34%. Samsung and SK Hynix join OpenAI’s Stargate. Taiwan rejects U.S. proposal to split chip production. Trump-linked crypto firm plans expansion. Some stocks that doubled in the third quarter.
Bleak Headlines vs. Market Optimism
U.S. Government Shutdown: The federal government ground to a halt, but markets didn’t flinch. In fact, the S&P 500 rose 0.34% and closed above 6,700 for the first time.
ADP Jobs Miss: Private payrolls fell by 32,000 in September 2025, a sharp miss – at least compared to the expected 45,000 gain. Yet traders shrugged it off as other bad news is shrugged off too!
Fed Rate Cut Hopes: Weak data often fuels expectations that the Federal Reserve will cut interest rates. Traders are now betting on a possible cut in October 2025, which tends to boost equities.
Historical Pattern: According to Bank of America, the S&P 500 typically rises ~1% in the week before and after a government shutdown. So, this isn’t unprecedented—it’s almost ritualistic at this point.
Why the Market’s Mood Diverges
Animal Spirits: Investors often trade on sentiment and positioning, not just fundamentals. If they believe the Fed will ease policy, they’ll buy risk assets—even in the face of grim news.
Data Gaps: With the Bureau of Labor Statistics’ official jobs report delayed due to the shutdown, the ADP report gains more weight. But it’s historically less reliable, so traders may discount it.
Tech Tailwinds: AI stocks and semiconductor news (e.g., Samsung and SK Hynix joining OpenAI’s Stargate) are buoying sentiment, especially in Asia-Pacific markets.
U.S. Government Shutdown October 2025
Prediction
Traders in prediction markets are betting the shutdown will last around two weeks. Nothing too radical, since that’s the average length it takes for the government to reopen, based on data going back to 1990.
The government stoppage isn’t putting the brakes on the stock market momentum. Are investors getting too adventurous?
History shows the pattern is not new. The S&P 500 has risen an average of 1% the week before and after a shutdown, according to data from BofA.
Even the ADP jobs report, which missed expectations by a wide margin, did little to subdue the animal spirits.
Private payrolls declined by 32,000 in September 2025, according to ADP, compared with a 45,000 increase reportedly estimated by a survey of economists.
Payroll data
The Bureau of Labor Statistics’ (BLS) official nonfarm payrolls report is now stuck in bureaucratic purgatory and likely not being released on time.
The U.S. Federal Reserve might place additional weight on the ADP report — though it’s not always moved in sync with the BLS numbers. Traders expect weak data would prompt the Fed to cut interest rates in October 2025.
It’s a bit like watching a storm roll in while the crowd cheers for sunshine—markets are forward-looking, and sometimes they see silver linings where others see clouds.
Summary
Event
Detail
🏛️ Government Shutdown
Began Oct 1, 2025. Traders expect ~2 weeks based on historical average
📉 ADP Jobs Report
Private payrolls fell by 32,000 vs. expected +45,000
📈 S&P 500 Close
Rose 0.34% to close above 6,700 for the first time
