Macro Moments Weekly: US impresses as Europe worries

This week, with the holiday mood in the air, we award a turkey to the UK government for its mistakes preparing the November budget, spot doves and hawks flocking in the US Federal Reserve (Fed), notice savvy owls monitoring Europe’s bond market, and preview how chickens could emerge in distressed financial markets.

The economy

In the United Kingdom, the effects of the pre-budget uncertainty are very clear in the October GDP number, which showed the economy contracted by 0.1%. One-month numbers are notoriously volatile, but when it’s the service sector leading the contraction, one should take note. More discouraging is that the sector has posted negative month-on-month numbers for three of the last four months.¹

Bond markets

The Fed dominated the news this past week, as the Federal Open Market Committee cut rates by 25 basis points. The most remarkable feature was the split vote with two members voting to hold rates steady, and one voting to cut them by a greater amount. This is neither hawkish nor dovish, but more a demonstration of independence. Also, the FOMC raised the projected rates in the “dot plot” (Summary of Economic Projections), with doves and hawks moving it in equal measure.

Bond markets liked what they saw in the United States. Not only did the Fed deliver the third rate cut in the cycle, the balanced nature of the internal debate suggests a degree of caution, which the bond market always welcomes!

What has been interesting to see in Europe is how the fears over German bond issuance are really gathering. Across Europe, spreads to German 10-year bunds are at one-year lows. There are a few exceptions, such as France, Sweden and Norway—countries that are also planning increased fiscal expenditure. Even the United Kingdom is at a one-year low! The flip side of this coin is the bond markets are expecting the Germans to spend and spend big. Conventional wisdom is that they will fail to spend the cash, as they did during the COVID-19 pandemic, and bond investors are savvy.

Equities

As the distractions of the holiday season begin to take effect, the stock market still managed to deliver the third consecutive week of gains. The message from our “worms” (charts plotted to show the movement in analysts’ estimates for the index over time, which tend to resemble squiggly lines) is this has been a very unusual year. First, earnings expectations set at the start of 2025 for Europe are being beaten, which is unusual; normally, analysts are too optimistic at the start of the year. Second, the forecasts for 2026 are rising sharply. Much of this has been due to better 2025 earnings in the last quarter, which, oddly, analysts have preferred to show in 2026 numbers, not 2025. This means to us there is real room for upside surprise in the fourth-quarter reporting season, which begins next year.

Parting shot

I was fortunate to be asked to participate in an exciting institutional investor workshop examining high-stress market scenarios/shocks and investor reactions to them. In every case, the portfolio that the audience preferred was the most defensive one, and it was also the portfolio that took the most action after the hypothetical event. In no case did the audience prefer to try to “sit it out” as was often the panel’s recommendation. It seems the world remains easily scared.