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European Stocks Gain Amid Economic Data, UK Wage Growth Hits Two-Year Low

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European markets closed higher on Tuesday as investors processed new economic data following a period of market volatility. The pan-European Stoxx 600 index saw a 0.5% increase, with most major stock exchanges and sectors showing gains. Health care stocks led the charge with a 1% rise, while mining stocks dipped by 0.5%. This positive movement came after a mixed performance on Monday, when the focus was largely on upcoming inflation reports from the U.S. and the U.K.

In the U.K., the latest wage data from the Office for National Statistics revealed that pay, excluding bonuses, grew by 5.4% year-on-year between April and June, marking the slowest growth rate in two years. Despite the slowdown in wage growth, the unemployment rate fell to 4.2% from 4.4%, defying economists’ expectations of an increase to 4.5%.

Jack Kennedy, a senior economist at Indeed, noted that the U.K. labor market remains “fairly tight,” with wage pressures easing only slightly. This gradual softening could limit the extent of monetary easing the Bank of England can implement this year. The central bank recently cut interest rates by 25 basis points, bringing the key rate to 5%. As inflation data for July is set to be released, economists anticipate a slight uptick in the headline rate to 2.3%, following two months at 2%. Markets are pricing in the likelihood of further rate cuts totaling 50 basis points before the end of the year.

Following the labor market data, the British pound strengthened, rising 0.4% against the U.S. dollar to $1.2823. Globally, investors are also closely watching U.S. inflation data, seeking insights into the health of the world’s largest economy. On Tuesday, the U.S. producer price index, which measures wholesale prices, showed a modest 0.1% increase for July, falling short of expectations. This lower-than-expected rise could pave the way for the Federal Reserve to consider lowering interest rates.

U.S. stock markets responded positively to the news, with attention now turning to the consumer price index report due on Wednesday, which is expected to provide a clearer picture of inflation trends and future monetary policy actions.

 

Record Low Inflation Expectations Amidst Mixed Economic Signals

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In July, consumer confidence regarding inflation showed a significant shift, as the New York Federal Reserve’s monthly Survey of Consumer Expectations reported a record low in the three-year inflation outlook. According to the survey, consumers now anticipate inflation to fall to 2.3% within the next three years, marking a substantial decrease of 0.6 percentage points from June and setting the lowest expectation since the survey’s inception in June 2013.

This dip in long-term inflation expectations comes despite consumers foreseeing continued elevated inflation in the short term. The survey’s results indicate that while inflation is expected to remain higher over the next year, it is projected to recede over the following years, easing concerns about persistent high inflation.

The improved three-year outlook is a critical factor for both policymakers and investors, who closely monitor inflation expectations to gauge future economic conditions. These expectations influence consumer and business behaviors, which in turn can affect actual inflation outcomes. The Federal Reserve, which has been aggressive in its rate-hiking cycle to combat inflation, may find these results encouraging as it considers its next steps. The market has already priced in the possibility of at least a quarter-point rate cut in September, with some anticipating a full percentage point reduction by year-end.

However, while the medium-term outlook is more optimistic, expectations for inflation over the next one and five years remain unchanged at 3% and 2.8%, respectively. This suggests that while consumers are hopeful for a decline in inflation, they are still cautious about the immediate future.

There was further positive news in the survey regarding specific consumer goods. Expectations for the increase in gas prices over the next year dropped to 3.5%, down 0.8 percentage points from June, while the expected rise in food prices also edged down slightly to 4.7%. Additionally, household spending growth expectations fell to 4.9%, the lowest level since April 2021, indicating a potential cooling of demand pressures that have contributed to inflation.

Conversely, the survey highlighted concerns in other areas. Expectations for cost increases in medical care, college education, and rent have all risen. Notably, the anticipated increase in college costs jumped by 1.9 percentage points to 7.2%, while rent, a key component of the inflation basket, is expected to rise by 7.1%, up 0.6 percentage points from June. These rising costs in essential sectors could complicate the overall inflation picture and pose challenges for the Federal Reserve’s efforts to bring inflation down to its 2% target.

Employment expectations also reflected a mixed economic sentiment. Despite a rise in the unemployment rate, consumers felt more secure in their jobs, with the perceived probability of losing one’s job falling to 14.3%, a slight improvement. Furthermore, the expectation of voluntarily leaving a job, often seen as a sign of confidence in the labor market, increased to 20.7%, the highest since February 2023.

Overall, while the record low in the three-year inflation outlook is a positive sign, the mixed signals from other economic indicators suggest that the path to stable, low inflation may still face significant hurdles.

 

U.S. Stocks Edge Higher Amid Weekly Declines and Economic Uncertainty

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U.S. stocks saw modest gains on Friday, though all three major indexes—the Dow Jones Industrial Average, S&P 500, and Nasdaq—remained on track for small weekly losses. This movement followed a turbulent start to the week, driven by fears of a potential recession and the unwinding of a global yen-funded carry trade. Despite recent rallies, Wall Street was unable to fully recover from Monday’s steep decline.

The technology sector led the day’s gains, yet both the S&P 500 and Nasdaq were poised for a fourth consecutive week of losses. Meanwhile, the Cboe Volatility Index (VIX), often referred to as Wall Street’s “fear gauge,” decreased on Friday after spiking to 65.73 earlier in the week.

Monday’s market drop was largely attributed to last week’s sharp sell-off, which was triggered by a disappointing July jobs report that fueled recession concerns. These worries were exacerbated by the Bank of Japan’s interest rate hike on July 31, which resulted in a significant appreciation of the yen, a currency often used in carry trade investments. This led investors to unwind their positions, contributing to market instability.

Market participants remain on edge as they anticipate further uncertainty in the coming weeks, particularly in the lead-up to the Federal Reserve’s next policy meeting on September 17-18. Current market sentiment, as reflected in the CME Group’s FedWatch Tool, suggests a 55% chance that the Fed will reduce interest rates by 50 basis points, with a 25 basis point cut seen as having a 45% probability.

On the day, the Dow Jones Industrial Average rose by 27.13 points (0.07%) to 39,473.62, the S&P 500 gained 21.67 points (0.41%) to 5,340.98, and the Nasdaq Composite added 72.48 points (0.44%) to close at 16,732.50.

Investors are now looking ahead to next week’s reports on U.S. consumer prices and retail sales for July, which could provide further insights into the likelihood of a soft landing for the U.S. economy. On Thursday, Federal Reserve officials expressed confidence that inflation was cooling sufficiently to justify upcoming interest rate cuts, with the timing and size of these cuts likely to depend on forthcoming economic data.

In individual stock news, Take-Two Interactive Software saw gains as it forecasted growth in net bookings for fiscal years 2026 and 2027, while Expedia advanced after surpassing analysts’ expectations for second-quarter profits.

On the NYSE, advancing issues outnumbered decliners by a 1.22-to-1 ratio, while on the Nasdaq, decliners outpaced advancers with a 1.26-to-1 ratio. The S&P 500 recorded 13 new 52-week highs and 3 new lows, while the Nasdaq registered 48 new highs and 142 new lows.