Kevin Warsh's Fed debut moves a rate hike from the calendar to the destination

The interesting thing about July's UK inflation data is where it came from. Headline CPI rose to 2.9% from 2.6%, driven by housing and household services and by furniture — and while services inflation slowed from 3.6% to 3.4%, goods inflation went the other way, from 1.7% to 2.2%. That rotation is what energy pass-through looks like when it moves from the pump into manufactured products. Bailey used Jackson Hole to describe second-round effects as quite subdued and the labour market as softening, which is consistent with his 6–3 vote to hold at 3.75% in July and with wages growing 3.5% excluding bonuses — real growth of 0.7%, hardly the stuff of a wage-price spiral. The Bank's own projection has CPI peaking near 3.2% in the fourth quarter.

Growth is doing better than the mood suggests. Q2 GDP came in at 0.4%, with June alone up 0.3% — though the ONS attributed part of that to World Cup-related turnover and hot weather, which is not a repeatable input. The IMF still has the UK growing 1% this year.

The euro area has the harder position. Inflation ticked up to 2.9% in July, the deposit rate sits at 2.25% after June's hike — the first in three years — and this week's ECB minutes went out of their way to say the July pause should not be read as the end of the cycle. September is now almost fully priced. What is easy to miss is that the ECB's own June projections have headline inflation averaging 3.0% for 2026 as a whole. The institution has effectively conceded it will spend the entire year above target.

In the US, headline PCE held at 3.7% against a 3.6% consensus, CPI slowed to 3.4%, and Q2 growth was confirmed at 1.5% against Q1's 2.1%. Jobless claims at 203,000 show no crack yet; the flash composite PMI slipped to 51.0 from 51.3 even as manufacturing output hit a 55-month high. The two releases that decide September are payrolls on the 4th and CPI on the 11th.

The FTSE 100 spent the week in a 10,730–10,870 range, pulled in two directions. Brent fell to around $89, heading for a weekly decline of more than 5% as the Iran sanctions announcement disappointed relative to its billing — which drags on the energy weighting that has done so much of the FTSE's work this year while quietly relieving the input cost pressure on everything else in the index.

The DAX did better, helped by GfK consumer climate rising to −26.6 from a revised −29.4 — a fourth consecutive monthly improvement and comfortably ahead of the −29.5 consensus. European technology rose about 1.8% on Friday on Nvidia's read-across, with SAP and Infineon carrying that in the German index. The CAC 40 has been the laggard of the three over recent weeks, which is what happens when a quarter of your index leadership is luxury and the Chinese consumer is not showing up.

The rate divergence is the mechanism that matters. Bailey holding at 3.75% while Warsh hikes would weaken sterling against the dollar, and a weaker pound raises the sterling cost of dollar-denominated energy and dollar-priced Far East goods. For Next, JD Sports and B&M, that shows up as an FX drag on gross margin one to two quarters out — and for the Bank it shows up as an imported inflation impulse arriving just as the October price cap resets. The 5% VAT removal on domestic electricity from 1 October, worth roughly £45 on the average bill, buys back a fraction of that.

The S&P still closed the week up around half a per cent despite Friday's pullback, having rallied on Thursday when Nvidia and Salesforce landed. Thursday told the real story. The index rose while ten of its eleven sectors fell; XLK gained 3.2% and everything else was flat or lower. Decliners beat advancers on the NYSE, and the Nasdaq recorded 85 new 52-week lows against 73 new highs on a day the Nasdaq itself rallied.

Friday's internals were the more revealing pair. IWM fell 1.32% against QQQ's 0.46% — a spread that comes down to balance sheets. Russell 2000 constituents carry far more floating-rate debt as a share of liabilities than the megacaps, and a Fed that is talking about insufficient restriction is talking about a repricing of the 2026–27 refinancing wall. For the most indebted small caps that becomes a solvency question. A VIX still subdued through Thursday looks like a market that has not yet worked through what Warsh actually said.

Scott Bessent launched Operation Economic Outcast on 24 August, promising to sever every economic lifeline sustaining Tehran and threatening secondary sanctions on anyone still trading with Iran. Oil fell more than 5% on the week. Deutsche Bank's note explained why: sixty designated entities and individuals, and no concrete new mechanism. Markets read the gap between rhetoric and content correctly.

The exposure that matters is downstream of the naming of China, which takes roughly 90% of Iran's oil exports, alongside Turkey, India, Iraq, Oman, Pakistan, Armenia and Azerbaijan. If Washington actually designates Chinese refiners or, worse, Chinese banks with dollar-clearing relationships, the US–China relationship moves from tariffs into financial conflict — and the first casualties are the companies sitting on the semiconductor fault line. ASML, already operating under export restrictions on EUV tooling, and TSMC, whose order book depends on both American design customers and Chinese-adjacent demand, are where that risk gets priced. Nvidia has already told investors it assumes zero China data centre compute revenue in its guidance, which is management pre-writing the worst case rather than hedging it.

The Canada breakdown is the more immediately quantifiable event. Fifty per cent tariffs on roughly $20bn of goods — wine, cement, building materials, hockey sticks, clothing — with Carney's dollar-for-dollar response due 8 September, covering steel, dairy, appliances, agricultural equipment and electronics. Canadian lumber and cement flow into American residential construction, and shelter inflation is already running at 3.2% and is the hardest CPI component to shift. A 50% duty on those inputs raises the cost of building a house at exactly the wrong moment in the Fed's deliberation. D.R. Horton, Lennar and PulteGroup absorb that in gross margin or pass it to a buyer already facing a higher mortgage rate; Nucor and Cleveland-Cliffs are on the other side of the trade. Deere sits directly in the path of the retaliation list.

At home, the Burnham government's clearest market signal remains the £8.4bn Dreadnought commitment, of which £5.9bn goes to BAE Systems and £2.5bn to the supply chain, sitting inside a Defence Nuclear Enterprise budget of over £63bn across four years and some 47,000 jobs. Rolls-Royce builds the propulsion units in Derby. Barrow has raised productivity 40% in three years, which is the number that determines whether the programme runs to schedule or becomes a Treasury problem in 2030. Babcock and QinetiQ hold the second-tier exposure.

1. Nvidia's Data Centre Revenue Is a Power Consumption Forecast

Nvidia's data centre revenue of $89.0bn, up 117%, is a power consumption forecast disguised as an earnings release. Every Blackwell Ultra rack shipped is a claim on a grid connection, and the second-order beneficiaries sit in electricity rather than silicon: Constellation Energy and NextEra in the US, National Grid through its American transmission business, and Rolls-Royce's small modular reactor programme, whose commercial case improves every quarter that hyperscaler siting decisions are constrained by power availability rather than capital. The corresponding cost sits with the cloud providers themselves, and with industrial users in Ireland, Texas and Virginia who compete for the same megawatts.

2. Salesforce's Move Flatters the Software Layer

Salesforce's 22.6% Thursday move deserves closer reading than it got. Net income jumped 87%, and the company pointed to a $2.6bn gain on its Anthropic stake — the same mark that Alphabet and Microsoft also recognised this week. Core revenue grew 11%. The AI trade has split into a hardware layer where the revenue is real and triple-digit, and a software layer where the reported uplift is currently being flattered by investment marks on a private company. When those marks stop compounding, Workday, ServiceNow, SAP and Sage will need organic AI revenue to justify the multiples the market has assigned. Q3 results are the test.

3. China's Weakness Is Still Unpriced in European Luxury

China's July data was weak in every component that matters to European earnings: industrial output down to 4.5% from 5.3%, retail sales at 0.6% from 1%, fixed asset investment contracting 6.7% year-to-date. Luxury has already de-rated from its 2025 highs, but LVMH, Kering, Richemont and Burberry are all still priced for a Chinese consumer who eventually returns. Burberry has the ugliest combination — a turnaround that needs China, sterling exposure that cuts against it if the Fed hikes alone, and an October Budget that could touch domestic high-end demand.

4. Gold and the Real Rate Squeeze

Gold caught a safe-haven bid on the 25th and is sitting well above pre-conflict levels with real rates barely positive — PCE at 3.7% against a policy rate in the 3.5–3.75% range. A hike compresses that spread and historically pressures bullion. Barrick, Newmont, Agnico Eagle and Endeavour Mining have lagged the metal all year, and that gap means the shares are geared to whatever gold does next — hard in both directions.