Market Commentary 20th October 2025 – from Matt Taylor

The UK’s unemployment rate rose to 4.8% in the three months to August 2025, slightly above market expectations and marking the highest level since mid-2021. Despite this, employment grew by 91,000 to 34.2 million, supported by gains in part-time roles and workers aged 65 and over. The number of individuals holding second jobs declined slightly over the quarter but rose year-on-year to 1.323 million, representing 3.86% of total employment. Economic inactivity remained broadly unchanged at 21.0%.

UK real GDP, which adjusts for inflation, rose by 0.1% in August 2025, recovering from a 0.1% decline in July and aligning with market expectations. Growth was led by a 0.4% rebound in production output, particularly in manufacturing and utilities, although mining and quarrying fell sharply by 2.3%. The services sector remained flat for the second consecutive month, with gains in administrative and health services offset by declines in retail, entertainment, and transport. Construction output dipped by 0.3%, driven by reduced repair and maintenance activity. On a year-on-year basis, GDP grew by 1.3%, slightly below the previous month’s revised figure of 1.5%.

Germany’s inflation rate rose to 2.4% in September, marking the highest level since February and confirming preliminary estimates. Core inflation edged up to 2.8%, driven by rising service costs, particularly in passenger transport and social services. While energy prices continued to decline, the pace slowed, and food inflation moderated overall, despite sharp increases in specific categories like fruit and confectionery. On the economic sentiment front, the ZEW Indicator rose slightly, reflecting cautious optimism amid global uncertainty and domestic policy challenges. Export expectations improved for key industrial sectors, although the automotive outlook weakened. However, the current conditions index fell to its lowest since May, highlighting persistent concerns about Germany’s near-term economic health.

France’s annual harmonised inflation rate accelerated to 1.1% in September, the highest since January, with core inflation rising to 1.3%. Price increases were most notable in services, food, and tobacco, while energy price declines moderated. Despite this, the monthly consumer price index fell by 1%, driven by seasonal drops in service costs, particularly accommodation and transport. Politically, Prime Minister Sébastien Lecornu survived two no-confidence votes, allowing him to focus on passing the 2026 budget. However, his position remains fragile, with opposition parties poised to challenge him again. His survival came at the cost of freezing President Macron’s key pension reform, reflecting the delicate balance required to maintain parliamentary support.

Federal Reserve Chair Jerome Powell’s recent remarks signalled that the central bank is nearing the end of its balance sheet reduction program, a move interpreted by markets as a dovish shift in monetary policy. While he did not provide long-term guidance on interest rates, Powell reiterated concerns about a tightening labour market and the balance of risks between inflation and employment. His comments, though technical in nature, are closely watched by financial markets as they hint at a possible pause or adjustment in the Fed’s policy trajectory.

Meanwhile, the NFIB Small Business Optimism Index fell in September, its first decline in three months and below expectations. Inflation and supply chain disruptions remain key concerns for small business owners, with 14% citing inflation as their top issue and 64% reporting supply chain impacts. Despite these challenges, earnings improvements offered a positive note, and businesses continue to show resilience amid policy uncertainty and labour market pressures.

US banking stocks came under pressure at the end of last week after Western Alliance Bank and Zions Bank disclosed exposure to bad or potentially fraudulent loans, reigniting concerns over the sector’s lending practices. The news triggered a global sell-off in financial equities, with fears spilling into broader markets despite strong earnings reports. The unease was compounded by earlier bankruptcies in the auto lending space, prompting caution from investors and remarks from JP Morgan CEO Jamie Dimon, who warned that “when you see one cockroach, there are probably more.”

China’s trade surplus rose to USD 90.45 billion in September, slightly below expectations but higher than the same period last year, driven by strong export growth of 8.3% year-on-year, the fastest pace since March. This reflects China’s continued diversification into markets beyond the US, with notable gains in shipments to Associations of Southeast Asian Nations (ASEAN), the EU, and regional partners. Imports also surged by 7.4%, supported by domestic demand ahead of Golden Week and infrastructure spending. However, geopolitical tensions with the US and the looming expiration of the current tariff truce add uncertainty to the outlook. Meanwhile, consumer prices fell 0.3% year-on-year, driven by a sharp decline in food prices, although core inflation rose to a 19-month high of 1.0%, suggesting underlying demand remains resilient.

Japan’s industrial production declined by 1.6% year-on-year in August, marking a sharper contraction than the previous month and the second consecutive monthly drop. The data points to ongoing weakness in the manufacturing sector, reflecting subdued global demand and domestic challenges. The decline adds pressure on policymakers to support growth, especially as Japan continues to navigate a fragile post-pandemic recovery.

GBP / EUR – Current 1.1519 Previous 1.1498

The Pound gained 0.50% and 0.18% against the US Dollar and the Euro last week, respectively.  The UK economy grew by 0.1% in August, rebounding from a contraction in July. Industrial and manufacturing production also rose more than expected, boosting investor confidence in the Pound.