Susannah Streeter, Chief Investment Strategist, Wealth Club: ‘’Investors are wary at the end of the week, amid a fresh surge in government borrowing costs, as efforts to intervene in bond markets by the Trump administration failed to have their desired effect. The FTSE 100 is set for a flat start as a wait and see mood percolates and the latest retail sales figures are assessed. It’s clear that consumers are less confident, reining in purchases as higher bills land. The latest snapshot of retail sales showed, as expected, a drop in July, as the jump in the energy price cap pushed up household costs and shoppers grew weary under the intense heat. Trips to high streets as temperatures rocketed were a turn off, and there was even less browsing online amid the hot weather bomb as people sought to cool off in the shade. It also seems that promotions in June, sucked in sales, leading to a vacuum in July, with discretionary items like furniture and footwear particularly hard to shift. Nice to have but not essential expenditure falls by the wayside when consumers are facing an uphill climb to stick to budgets. The feel good factor around the World Cup did help give some lift to food sales, but the picture painted in this snapshot is of a less resilient consumer, particularly given the 1% uplift in sales in June, being revised down to 0.7%.
Higher energy costs are keeping up the inflationary pressures with Brent crude staying above $93 a barrel, up more than 5% this week. The US-Iran conflict shows no sign of abating, with the standoff over the Strait of Hormuz keeping a hefty risk premium baked into oil prices, while disruption to Russian energy infrastructure is adding another layer of uncertainty. With energy prices feeding through into transport, heating and the cost of goods, a sustained rise in crude could make the inflation battle even more difficult.
The turmoil in the debt markets continues despite efforts to calm feverish borrowing costs. US Treasury Secretary Scott Bessent tried to throw cold water onto hot government bond yields by doubling the size of planned Treasury buybacks, but it’s not touching the sides of the deep-seated problem. Investors remain concerned about inflationary risks and the growing mountain of government borrowing, while at the same time, debt being issued by tech giants building out the AI revolution is offering stiff competition. Given the high ratings on the corporate bonds being pumped out by the hyperscalers, more capital has another attractive destination beyond Treasury markets, adding to the pressure on government debt. Higher yields are also giving equities a run for their money, with investors seeking out more stable returns compared to the risks inherent in equity markets, given the mega valuations out there.
The yields on long-dated Treasuries are back above 5.3%, having dipped on Thursday. Thirty-year gilt yields have been hovering around 5.8%, as concerns continue to swirl about the UK’s fragile fiscal position. The latest snapshot of UK government borrowing won’t do much to assuage fears that Britain is living beyond its means. Borrowing came in at £1.8 billion in July 2026, which was £0.7 billion more than in July 2025, and £2.3 billion above the Office for Budget Responsibility’s forecast. Even though the amount the Exchequer is pulling in through higher taxes grew, helped by a strong influx of self-assessed income tax revenue payments, it’s being outpaced by spending on public services, benefits and debt payments. Although debt interest costs were lower than in recent months, they are stubbornly higher than a year ago, which is keeping the new Prime Minister in a highly tricky position. It comes at a time when Andy Burnham is under pressure to deliver more meaningful support to households facing a cost-of-living squeeze, but he’s still operating under the highly watchful eye of the bond market. This is the latest borrowing data to arrive under new Chancellor John Healey’s watch and it is likely to lead to difficult decisions at the Treasury. Signs of greater profligacy with taxpayers’ money could set off another spiral higher in borrowing costs, limiting available funds even further, given the eye-watering cost of servicing the debt.’’
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