CONTRIBUTORS
Michael Browne
Global Investment Strategist,
Franklin Templeton Institute
Macro
The Purchasing Managers Index (PMI) data for the United Kingdom and Europe released this week was weak. No post-holiday bounce for manufacturers, who are seeing export orders contract. Services were better, held up by Germany but let down by the United Kingdom and France. Price pressure is not an issue except in the United Kingdom, where it is a challenge for the service sector. Input costs are still rising faster than output. The cause for this is wages, and the biggest price setter for wages is the government. Optimism is also in short supply, and this all could be of benefit for the Bank of England’s Monetary Policy Committee (MPC), if only service sector wages would fall.1
Meanwhile in Sweden, the government’s expansionary spending budget was greeted two days later by an unexpected rate cut by the Riksbank. The government’s tax cuts, higher defence spending and even a value-added-tax (VAT) cut on food clearly left the central bank happy, although it did hint that, with rates at 1.75%, it is finished cutting. Sweden’s forecasts for 2026 include 3.1% gross domestic product (GDP) growth, 1.3% inflation, a budget deficit of 2.4%, and government debt to GDP of about 36%.2 Where European governments can spend, they will, and there is plenty more where that came from. Swedish Miracle, anyone?
Meanwhile in France, the new prime minister, Sebastien Lecornu, met with labour union leaders on 24 September, who promptly announced a new nationwide strike to take place on 2 October. The Macron muddle-through continues.3
Something interesting is happening in the natural gas market. It was a good summer for filling up the storage tanks around Europe, which now are 80% full.4 Although the cost of electricity has risen, gas prices are unmoved and previous linkages between the prices of carbon and gas seem to be breaking down. Traders are hedging against expectations of a cold winter, as forecasts indicate it is likely to be below seasonal averages. The non-moving gas price is very significant for the United Kingdom, where it is the basis for setting power prices for households. So, could there be a little good news for inflation coming?
Equities
We remain in the doldrums for company news, as the third quarter reports loom. The market is looking and waiting for surprises good and bad, and positive news has come from a much-unexpected source: The UK and European consumer. Kingfisher (United Kingdom) rallied on top-of-the-range numbers this week and gained 20%, while H&M (Sweden) rose over 10%. It is likely that short positioning has helped these gains, making the point that it’s not all bad on the High Street.
The old market adage, ‘only research what you love and what you hate,’ is clearly at play here.
As a Friday bonus, we have a renewed US tariff threat for European pharmaceuticals production: Make here (USA) or pay, is the simple call from US President Trump. How it will work in practice is another matter, but it still means more trouble for Switzerland and Ireland. The former have been in talks in Washington, which presumably are not going too well.
Fixed income
It’s all about issuance: The United Kingdom had a miserable week as investors shouted ‘pass’ at the latest Gilt issue.5 Everyone is waiting for the Budget on 26 November, and it will be a long wait for those in the Debt Management Office. They will probably have no help from the ruling Labour Party’s conference, which will likely feature calls for unfunded spending, in particular from Starmer’s new rival, Andy Burnham. Speaking to The New Statesman, he expressed disdain for the bond market’s hold on policy and on his spending ambitions, saying, “We’ve got to get beyond this thing of being in hock to the bond markets.”6 Investors have not been kind to that.
In Germany, there has been some slowing of the Merz plan: It’s simply harder to spend money than originally thought. This has led to a reversal of spread trades involving bonds of other euro members versus German Bunds. While many expected spreads to narrow toward Bunds, last week saw widening for most. Could this be an early signal that the trade is over?
Sentiment
In my meetings with clients this month, there have been three simple questions: What is the state of the US economy? Is artificial intelligence (AI) just another boom/bust, and is it about to go bust? And slowly, with furrowed brows, in hushed tones, ‘What should we do about the United Kingdom?’
The United States is now in the post-tariff landscape, where inflation is the dog that didn’t bark and growth, while no great shakes, isn’t too bad, either. This has allowed the US Federal Reserve (Fed) to cut interest rates, and you never fight the Fed. The Fed’s ‘dot plot’ (its Summary of Economic Projections) tells you the direction, if not the timing, of likely future rate cuts. As for AI, it is the first industrial revolution where the financing comes from cash flows, so no bust is likely. We are seeing a possible oligopoly forming as well, so pricing will be the key. And the lower the price, the faster the roll out.
At last, the United Kingdom: We have to wait for the budget to find out if the government can regain credibility. If it does not, as in 2022, markets will force credibility upon them. So investors need to work out what represents good value in long Gilts and mid-cap stocks. It’s possible prices could reach those levels, and one might need to ignore noise and thunder.
It has been a tough summer for UK assets, but it has been a great one for viticulture. Nyetimber, one of the oldest UK sparkling wine producers, writes, “It is wonderful, therefore, to know that 2025 will produce some outstanding wines.” It could yet be also for Gilts.
Endnotes
- Sources: S&P Global Flash UK PMI, 23 September 2025, and HCOB Flash Eurozone PMI. 23 September 2025. spglobal.com.
- Source: The Budget for 2026. Government offices of Sweden, Ministry of Finance. government.se. 22 September 2025.
- Source: ‘French Unions announce fresh day of strikes after talks with PM Lecornu collapse.’ euronews.com. 24 September 2025.
- Source: BNEF Carbon report. Bloomberg. 25 September 2025.
- Source: ‘Gilt auction demand is lowest in two years in sign of pre-Budget jitters.’ cityam.com. 25 September 2025.
- Source: ‘Andy Burnham’s plan for Britain.’ The New Statesman. 24 September 2025.
Terms
Purchasing Managers Index (PMI): Monthly reports tracking activity in the manufacturing and services sectors.
Spread trade: Spreads are the difference between yields on differing debt instruments of varying maturities, credit ratings, issuers or risk levels. “Narrow” in reference to spreads indicates smaller differences in yields.
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