The UK’s August GDP reading was in line with expectations, rising 0.1% on the month, the quarterly rate of growth was also confirmed at 0.3%, up from 0.2% in July. The July growth figure was revised lower to -0.1%, suggesting that activity picked up at the end of the summer.
There was a pickup in industrial and manufacturing production, which rose by 0.4% and 0.7% for August. The index of services was flat, and construction output fell 0.3% for August, which could be due to seasonal factors. In the three months to August, the ONS reported that services were the main driver of growth, higher by 0.4%, while production was a drag on GDP, falling by 0.3%. Today’s monthly data suggest that this position was reversed in August.
UK yet to benefit from US trade deal
The ONS also reported that the total underlying trade deficit widened in August to £5.2bn, up £1.7bn, led by a rise in imports from the EU. The UK’s favourable trade deal with the US is reaping no identifiable growth benefits as yet for the UK, the ONS reported that exports of goods to the US, including precious metals, was lower by £0.7bn. The trade deficit was down to trade in goods, where the deficit widened by £3bn in the three months to August, the trade in services surplus increased by £1.3bn in the same period.
Gold’s fresh record and oil price recovery could boost the FTSE 100
GBP/USD has backed away from intraday highs over the course of this morning, but remains above $1.3400 for now. We expect this data to have little consequence on the pound since the GDP figures were mostly in line with expectations. Ahead today, the surge in the gold price to a fresh record high could boost the FTSE 100’s gold miners. The yellow metal is now comfortably above $4,200 per ounce. The oil price is also rising after India said it would not accept oil from Russia, which could squeeze global supply. The oil price is higher by 0.8% on this news and Brent crude oil is back above $62 per barrel after falling below this level earlier in the session.
Tax rises could reach £50bn in this Budget
There is speculation that the upcoming Budget in the UK, scheduled for 26th November, could be the biggest tax-raising budget ever, second to Rachel Reeves’ first tax-raiding budget last year. The Institute of Fiscal Studies estimates that Rachel Reeves will need to raise tax by £22bn to maintain a thin £10bn of fiscal headroom, however, this may not be enough. The IFS argues that this would mean Reeves has a one in three chance of having to raise taxes once again. The IFS suggests that Reeves should raise taxes by £50bn to raise headroom by enough to not have to hike taxes again during this parliament. These reports will likely strike fear into the hearts of UK taxpayers, as £50bn of tax increases will likely come from broad sources, and not just the ‘wealthy’ , which is a variable term.
The IFS is considered centre left, so the reality is that the actual tax rises in this budget could be lower, added to this, there is no mention of spending cuts, which could come alongside tax rises. Thus, everything regarding the budget is pure speculation at this stage.
UK bond investors warm on bigger fiscal headroom idea
Interestingly, UK bond investors like what they hear from the IFS and others calling for a bigger fiscal buffer for the UK. UK Gilt yields are the top global performers this week, after a month of underperformance, and yields have been falling this wek. If there is one silver lining for the overtaxed UK worker, it is that interest rates could come down if we all get rinsed at this budget.
Earnings season key market driver
It has been an up and down week for risk sentiment. US stocks closed mostly higher on Wednesday. The top performers were a broad mix, AMD, Eli Lily, and some of the larger banks were the top performers in the S&P 500. There is no unifying theme for markets right now, as individual factors like earnings season dominate over geopolitics and tariff risks.
Futures markets are pointing to a mildly lower open for US stocks later today, European equity futures are also pointing to a small loss later this morning. The FTSE 100 is one of the weaker global equity indices this week and is lower by 1.3% over the past 5 sessions. Gold miners, Next, WPP and Burberry were some of the top performers on Wednesday. Endeavor Mining was also in the top 10 performers, but like US stocks, idiosyncratic factors like earnings are the bigger driver of UK markets this week. We expect this to continue, as investors remain laser focused on earnings season.
We expect the AI trade to get a boost from the positive earnings from Taiwanese chip maker TSMC later on Thursday. There are some earnings releases later today, but no big names, so the market may focus on the US/ China story and any fallout from the UK’s expected tax hikes.
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