Macro & Markets: Autumn’s green shoots

Macro

FINALLY!

The United Kingdom got some good news on inflation, with the headline September Consumer Price Index rate rising to 3.8% (not the 4% anticipated by markets), as food prices fell.¹ This comes alongside retail sales numbers that show food volumes are negative year-on-year. Is the UK getting slimmer? 

Retail sales data showed that non-food purchases were leading the way, and this was due to spending on clothing (owing to good weather), computers and gold.²  But perhaps the standout number is the growth in non-store retail. Internet sales started to accelerate from June, and when linked to GFK data (Nuremberg Society for Consumer Research) and rising confidence in big-ticket items, a trend is emerging. The giant UK cash pile can move if the price is right, even though Budget Day and Black Friday are still to come.

In Europe, external actions are the big news. The US Trump administration decision to place sanctions on Russian oil firms Rosneft, Lukoil, et al, have already impacted shipping to India and elsewhere, with a resultant spike in oil prices. But it’s also a German problem: In 2022, the German government forced Rosneft to put its ownership of 12% of German oil refinery capacity supplied by the Rosneft pipeline into a trust. This included its majority stake in the Schwedt refinery, which supplies 90% of petrol, diesel and aviation fuel for Berlin.³ Chancellor Merz is seeking clarification from the United States, or else he might be forced to nationalise something his predecessors would never have considered. 

The October release of European Purchasing Managers Index data provided a shock: The German service industry is now driving growth!⁴ The first rise in order backlogs since August 2022 drove the best numbers in 2.5 years, although manufacturing continued to decline.⁵ Is the German economy finally ending its manufacturing bias? In France, it’s the opposite, as the impact of the government collapse has undermined activity and confidence. Barring France, Europe as a whole is looking better, as the eight rate cuts from the European Central Bank in this cycle are beginning to work.

The UK economic picture appears to be half-German, half-French! (Think a mash-up of Monet and Richter.) On the one hand, services are better, and manufacturing clearly so. But on the other hand, everyone is citing weak consumer and business confidence in front of the government’s budget. Hidden in the statistics is further good news on prices, though.

Bonds

The UK bond markets extended the rally in Gilts on the back of inflation news and debated chances for another interest-rate cut for Christmas. We think inflation will hit 2% by this time next year, and that the market pricing in just two cuts over the next 12 months is too little. Three for sure, in our view, and four at a push. Spreads versus German Bunds have come in almost 20 basis points since mid-October, to a year-to-date low.

Equities

The reporting season is in its early days and is not too bad. After corporate Europe beat in the second quarter, analysts did not raise earnings numbers due to fears over tariffs and a weak US dollar. So far, misses are up a little, but we have had a slew of autos in the first weeks. Price reaction tells a different story, with beats outpacing the misses on their one-day return. Optimistic.

In the releases last week, we had something for everyone: Semiconductors had poor results, with ST Microelectronics agreeing with Texas Instruments. The reaction to Dassault Systems, as weakness in drug modelling, alongside ongoing auto sector woes, led to a decent 2026 downgrade. It’s worth noting that auto company profit margins are now almost down to their 2008 lows. To make things worse, China is threatening the supply of auto chips to Europe after the nationalisation of Nexperia by the Dutch government. We have seen the damage from a cyber attack on Jaguar Land Rover in the UK, costing £2 billion for a six-week outage.⁶ Stopping German production, as China’s action could, would cost many multiples of that.

Parting shot

The Chinese rare-earth minerals ban has really upset the European Union (EU). A leaders’ summit in the past week raised the spectre that the EU could use its biggest trade weapon, the Anti-Coercion Measure, in retaliation against China. The irony is that this trade missile was built in 2023 to counter Trump’s tariffs. It’s more evidence of regionalisation over globalisation.

All comedians know that timing is everything: The UK Chancellor of the Exchequer’s decision to leave the budget until just 29 days before Christmas is risky. It’s already impacting confidence, and a bad budget could see a crash in the pound sterling and a rise in interest rates and is likely provoke the inevitable Scrooge headlines. But a favourable budget, delivered just hours before US markets close for Thanksgiving and the UK online shopper gets stuck into Black Friday, might just be clever. That could be some short squeeze.