June was shaped by the inflationary fallout from the Iran war, which drove US and UK price data to multi-year highs and pushed the new Warsh-led Fed into a decisively hawkish stance. However, the closing days of June and the start of July marked a sharp reversal. An Iran ceasefire and the reopening of the Strait of Hormuz eased energy prices and inflation expectations, while a weak June US jobs report all but eliminated expectations of further rate hikes. What began as a clear "higher-for-longer” narrative has evolved into a genuinely two-sided, data-dependent stagflation.

Inflation remained the dominant theme, with May CPI increasing by 0.5% month-on-month, lifting the annual rate to 4.2% from 3.8%, the highest reading since April 2023, with energy accounting for more than 60% of the increase. Encouragingly, core CPI rose by only 0.2%, keeping the annual core rate at 2.9%, while core goods prices continued to decline. The Fed's preferred inflation measure painted a less encouraging picture: core PCE rose to 3.4%, the highest since October 2023, while producer prices accelerated to 6.5%, their strongest pace since the end of 2022.

The clearest indication that inflation may have peaked came from the June ISM manufacturing survey, where the prices index fell sharply, dropping 9.1 points to 73.0 as the ceasefire filtered through into lower energy costs. Meanwhile, the headline PMI remained in expansionary territory at 53.3.

May payrolls initially appeared resilient, rising by 172,000, but the June report showed a much weaker gain of just 57,000, roughly half the consensus forecast. April and May payrolls were revised down by a combined 74,000. Unemployment edged down to 4.2%, although this largely reflected a fall in labour force participation to 61.5% as workers exited the labour force. ADP also pointed to softer conditions, with employment rising by only 98,000, its weakest increase since March, while job openings remained broadly unchanged at 7.6 million. Wage growth of around 3.5% continued to lag inflation. Growth data were similarly uninspiring: Q1 GDP was revised up to 2.1%, but only because imports were revised lower, while consumer spending was marked down to 0.5%, the weakest pace since 2022. May retail sales posted a headline increase of 0.9%, but this was largely driven by higher gasoline spending.

Taken together, the labour market is clearly cooling, shifting the Fed's balance of risks away from June's singular focus on inflation. The late-June ceasefire in Iran and the reopening of the Strait of Hormuz represent the key new development. If lower energy prices prove sustained, they would remove the single largest driver of the recent inflation surge. However, with core PCE at 3.4% and PPI continuing to re-accelerate, underlying inflationary pressures have broadened to the point where lower oil prices alone are unlikely to bring inflation back to target.

May CPI surprised to the downside, holding at 2.8% versus expectations of 3.0%. However, services inflation, a key metric for the Bank of England, rose sharply to 3.7% from 3.2%, motor fuel prices jumped 24.6%, and producer input prices increased by 8.7%, the highest since February 2023.

April GDP declined by 0.1%, marking the first monthly contraction since August 2025, partly reflecting disruptions from the conflict in Iran. The June flash PMIs also weakened, with services dropping to a 41-month low of 48.7. The Bank of England left Bank Rate unchanged at 3.75% on 17 June in a 7-2 vote, with two policymakers favouring a rate increase, and lowered its projected peak inflation forecast to 3.25%.

China's activity data weakened across virtually every sector. May retail sales declined by 0.6% year-on-year, marking the first outright contraction since December 2022, while fixed-asset investment fell 4.1%, weighed down by a 16.2% collapse in property investment and the first decline in manufacturing investment since 2020. New home prices dropped 3.5%, extending a 35-month run of declines, with only Shanghai continuing to record price growth. On a monthly basis, prices also fell by 0.2%. Industrial output provided the lone bright spot, rebounding to 4.5% growth.

The forward-looking June PMIs offered a more encouraging outlook. The official manufacturing index returned to expansionary territory at 50.3, while the private Caixin index remained solid at 51.7, supported by AI- and high-tech export demand.

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