Macro & Markets: All’s not well with autos

Macro

German factory orders are always a bit slow in coming out, but the August numbers produced a stark reminder that Europe’s largest and most export-led economy remains under pressure, especially in chemicals and autos. Metals did well for orders from both domestic and export markets, which must be seen as odd given the European Union (EU) introduction of steel tariffs and quotas has come almost a month later.¹

In Poland, the central bank surprised markets with an interest-rate cut of 0.25%, bringing the level to 4.5%. Clearly, with growth forecast at 3.3% in 2026, inflation falling below 2.9%, a budget deficit of 6.5%² and debt to GDP at 60%,³ the central bank is happy. As in Sweden to the north, where the central bank cut interest rates last week in the face of 3% growth in 2026, Poland’s numbers are impressive. Are we witnessing the start of a Baltic growth miracle? 

Bonds

It’s not often that attention is diverted away from the United Kingdom (UK) as the world’s favourite bond problem, but in Japan, the election of Sanae Takaichi as leader of the LDP and the likely next prime minister (PM) of Japan, has caught the bond vigilante’s eye. Takaichi’s plans as PM are for fiscal stimulus while trying to stop the Bank of Japan tightening. This has already created problems, as Komeito, the LDP coalition partner for almost a quarter of a century, has resigned from the government. The markets clearly believe that even in a minority government, this dual expansionist policy will prevail, as two-year bond yields have fallen (suggesting expectations of no more interest-rate rises), and 10-year bonds yields are up. As a result, the currency has lost 4% in a week.⁴ With a new game in town for the bond vigilantes, the UK may get some respite but ought to listen and learn.

French bonds reacted with insouciance to the news the government had lasted even less time than Liz Truss. At the time of writing, we have no news on the next iteration. The key is that France is France and is not part of the changes happening across Europe. It's more ancien regime.

Equities

While gold and almost every other metal have grabbed headlines in recent days, driving up mining stocks, it’s a very old-fashioned sector that has provided the more fundamental news: autos. A profit warning from BMW cited two issues: First, sales volume and pricing in China are weakening, and the company does not expect an improvement any time soon. Second, the company is due a rebate from the US government for imports into the United States in August and September when tariffs were 27.5% but have since been dropped to 15%. This rebate, which is “high three-digit millions”, will not be paid until 2026. Put the two together and cash flows halve for 2025.  

Michelin echoed this with their comments⁵ and Mercedes, in a call with stock analysts, pointed out that third-quarter sales in China are -27% year-over-year.⁶ But the warning from Ferrari hurt the most. Making just 8,400 cars each year, with a legendary waiting list, corporations don’t want to disappoint the market with a cautious sales, profit and cash flow forecast for 2030 at their Capital Markets Day.⁷ The stock lost 14%, and while the Maranello⁸ bubble hasn’t burst, it is dented, even with the appearance of the first electric vehicle (EV).

The conclusion I come to from Europe’s auto sector is that Chinese demand is weakening, and this fact, coming on top of US tariffs, makes 2026 very uncertain, even for Ferrari.

Parting shot

The minutes of the meeting of the Bank of England Financial Policy Committee—the venerable body chaired by Governor Andrew Bailey that surveys the financial landscape looking for risks and assessing their impact on the UK economy—cited that, as its second-greatest concern after geopolitics and trade: “Equity valuations appear stretched, particularly for technology companies focussed on Artificial Intelligence”.⁹

But in its report from July of almost 100 pages, this concern is absent.¹⁰ Equity valuations have one mention (p.16), and “Artificial Intelligence” just four: in the glossary (p. 95), twice under “Safe Innovation” (p. 48) and on page 11 under “Contributing to Sustainable Growth”, safe innovation. We should all be interested to know what led this august group to develop such an acute understanding and awareness of this major risk over their summer holidays.