Macro & Markets: Automakers in heavy traffic

Macro

It was a week of contrast between the European Central Bank (ECB) and the Federal Reserve. For the third meeting in a row, the ECB is feeling comfortable. While perceived risks to inflation in Europe are more to the downside than upside, there is a gentle confidence that things are not too bad. Spain is rattling along nicely at 2.8% growth annualised to the end of the third quarter,¹ Sweden at 2.7%.² Even France surprised with a 0.9% year-on-year figure,³ and inflation remains subdued across the board. The risks to economic growth in Europe remain in the pipeline, as tariff effects and euro strength are filtering through.

Bonds

After a couple of weeks of rally, the evident comfort of the ECB has led yields higher again. Within this, spreads versus Germany continue to rattle in, in particular for UK Gilts, which touched a new one-year low last week. On Wednesday, the prime minister reinforced the sense that income tax is going up by refusing to deny it. Although his Chancellor of the Exchequer landed herself in hot water over a personal finance matter, it made no difference. An income tax increase in the UK (as described in “Macro & Markets: For the birds” on 6 October)—perhaps a 1% rise on the basic rate and a 5% rise on the top rate—would be a big positive for the debt market.

Equities

As the world focused on the US tech giants, we had two US themes play out in Europe: First, concerns about advertising agency WPP, which has failed to move fast enough with the times on digital and, in particular, on AI-driven advertising, where it warned again on profits.⁴ Client losses continue and expulsion from the FTSE 100 is a distinct possibility. WPP is among the disrupted.

Second, automaker VW: Its earnings miss in the past week was not down to tariffs, although they are painful.⁵ It's down to Porsche, saying batteries are not for us, or at least not for the consumer and our profit margins. It has long been evident that differentiating between one fast electric car and another is very hard. The added value of a brand seems low, barring some familiarity with automobile interiors.

Electric vehicle margins are low (see BYD’s poor numbers last week as well).⁶ Porsche buyers may like the hybrid for the extra acceleration, but that’s as electric as it gets. They want the sound of an engine. The firm’s strategic volte face will cost 4.7 billion euros.

The bigger warning from VW is that European car makers are running out of semiconductor chips, mainly because the Dutch government forcibly took over Nexperia from China. Global tensions are still alive.

Parting shot

The press—in its bubble-mania headlines—seems to ignore the fact that cash flow has mainly financed the AI boom. But as to whether this is a cyclical business, I suspect the chip maker SK Hynix recently gave a clue.⁷ They are sold out for 2026 and will raise capital expenditures to improve supply for 2027. In my view, this is not bubble behaviour, but capitalism working well. Companies faced with shortages in key materials tend to panic and order excess supply—hoover up whatever they can from wherever. They hoard. When supply constraints ease, they pull those orders. This contributes to the V shape of a cyclical downturn. But that is normal—unpleasant, but normal. Not a bubble.