Market Commentary 27th October 2025 – from Naigil Johnson

UK inflation held steady in September, with the annual Consumer Prices Index (CPI) remaining at 3.8%, unchanged for the third consecutive month and below market expectations of a 4% rise. Despite the softer reading, inflation remains well above the Bank of England’s 2% target. While Chancellor Rachel Reeves welcomed the lower figure, she stressed that she was “not satisfied with the numbers,” reiterating the government’s commitment to supporting households facing cost of living pressures and to driving sustainable economic growth.

The broader Retail Prices Index (RPI), which includes housing-related costs such as mortgage interest payments and council tax, rose 4.5% year-on-year in September, slightly easing from 4.6% in August and coming in below forecasts of 4.7%.

Consumer spending remained robust, with retail sales volumes rising again in September, marking a fourth consecutive monthly increase. Sales now stand at their highest level since mid-2022, indicating that consumer confidence has strengthened despite the cost-of-living pressures.

Business activity showed further signs of recovery. The Purchasing Managers’ Index (PMI) for the manufacturing sector pointed to a much slower pace of contraction in October, signalling that output and new orders are stabilising after a prolonged downturn. Meanwhile, the services sector continued to expand modestly, marking a second consecutive month of growth.

In Germany, producer prices continued to fall in September, declining for a seventh consecutive month, though at a slower pace than in August. The annual decrease of 1.7% appeared to reflect easing cost pressures within the industrial sector.

Survey data pointed to a mixed picture across the Eurozone’s major economies. In France, the PMI for the manufacturing sector showed a slight improvement in October but remained in contraction territory. In comparison, the services sector weakened further, marking a fourteenth consecutive month of contraction and the steepest downturn since February, as subdued domestic demand and weaker client activity continued to dampen output.

In Germany, business sentiment showed tentative signs of stabilisation. The manufacturing sector continued to contract mildly, though production levels have now expanded for eight consecutive months, suggesting that supply chains and output capacity are gradually normalising. Meanwhile, the services sector saw a stronger pace of expansion, recording its most robust performance since mid-2023. Rising new business volumes and improving client demand supported growth, particularly in business and financial services.

US inflation increased in September, with CPI rising to 3% year-on-year, up slightly from 2.9% in August and marking the highest reading since January. The increase was driven mainly by higher energy costs, particularly fuel oil and gasoline, while natural gas price gains moderated. Despite the uptick, inflation remained below market expectations of 3.1%. As the first major data release following the recent US government shutdown and just ahead of the Federal Reserve’s upcoming policy decision, the softer-than-expected reading appeared to strengthen market expectations that the central bank will cut interest rates, as policymakers will need to balance cooling price pressures with a slowing economy.

Meanwhile, core inflation, which excludes volatile food and energy components, eased slightly to 3% in September from 3.1% in the previous two months, coming in just below analysts’ forecasts. The decline in underlying inflation appeared to support the view that price growth is gradually normalising toward the Fed’s longer-term target.

In the housing market, existing home sales rose 1.5% month-on-month in September, the highest level in seven months. The improvement was supported by lower mortgage rates and better affordability, indicating tentative signs of recovery in a sector that has been under pressure from tighter credit conditions earlier in the year.

China’s economy grew 4.8% year-on-year in the third quarter of 2025, easing from 5.2% in the previous quarter and marking the slowest pace of expansion since Q3 2024. The result was broadly in line with expectations but underscored a loss of momentum following a strong start to the year. Growth appeared to be weighed down by ongoing trade tensions with the US, a persistent property market downturn and subdued consumer demand.

Industrial activity, however, showed renewed strength. Industrial production rose 6.5% year-on-year in September, the fastest pace since June, supported by a pick-up in manufacturing and mining output ahead of the Golden Week holiday. In contrast, retail sales grew at a slower 3.0%, marking the weakest increase in over a year and appeared to reflect continued caution among consumers amid a soft labour market and modest income growth.

In Japan, the annual inflation rate rose to 2.9% from 2.7% in August. The increase was largely driven by higher electricity and gas prices following the expiry of temporary government subsidies, adding to concerns that energy-related costs may re-emerge as a headwind for households in the coming months.

Japan’s trade balance remained in deficit, though the shortfall narrowed from a year earlier. Exports recorded their first annual rise since April, supported by a weaker yen and a new trade agreement with the United States easing tariffs on Japanese goods. Imports also increased for the first time in three months, reflecting stronger demand for energy and industrial materials.

Business activity showed signs of moderation, with the S&P Global Japan Composite PMI easing in October to its lowest level since May. The data signalled slower overall growth, as expansion in the services sector softened and manufacturing output contracted at a slightly faster pace.

GBP / EUR – Current 1.1451 Previous 1.1519

The Pound weakened both against the Dollar (-0.86%) and the Euro (-0.59%) last week. The decline appeared to follow the release of UK inflation data, which unexpectedly held at 3.8%, falling short of forecasts from both economists and the Bank of England.