How are the U.S. and UK economies faring?

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Market sentiment challenged

Last week saw a challenge to the prevailing market sentiment, moving from cautious optimism to a more pronounced nervousness, triggered by fragile geopolitical truces, evidence of economic cooling and (for gilts) a potential U-turn in UK fiscal planning.

Semiconductor stocks slid back after an extraordinary run

Source: LSEG Datastream

In the current financial landscape, a dichotomy exists between high-growth structural technology demand i.e. artificial intelligence (AI), and short-term cyclical credit risks. The two shouldn’t be directly connected but, as is so often the case, the best performing assets are susceptible to pullbacks when investor anxiety rises. That seemed to be the case last week.

Macroeconomic and credit backdrop: Signs of cooling

The best news of the week was that the U.S. government shutdown finally came to an end. While it was in place, we were without the usual catalogue of economic indicators. Those that were available (from private sources) were downbeat. For example:

U.S. small business nervousness −the National Federation of Independent Business (NFIB) survey of smaller businesses showed weakness across several categories. Companies are less confident that the economy will improve, they are less likely to increase employment and have lower expectations for sales.

Evidence of credit distress − the structural issues in the credit market are worsening, especially in less-liquid areas:

• Commercial real estate (CRE): the commercial mortgage-backed securities (CMBS) market − the most timely indicator of distress − confirmed a rise in delinquency. The CMBS loan delinquency rate (30+ days past due) rose to 5.66% in the third quarter of 2025 (source: MBA). While traditional bank data is lagged, this shows concentrated distress in non-bank and office-sector debt.
• Private credit: the Federal Reserve’s (Fed’s) Financial Stability Report (FSR), released on 7 November 2025, confirmed elevated vulnerabilities, noting that while banks are sound, the ability of risky privately held firms to service their debt continues to decline amid high corporate leverage.

UK economic fragility − the UK economy is suffering from a cautious business sector in anticipation of a tax hiking Autumn Budget. The unemployment rate rose to 5% in the three months to September, increasing the risk of weak consumer demand and late payments for small-to-medium enterprises (SMEs).

UK Budget speculation: The tax U-turn challenge

The focus last week on the Autumn Budget on 26 November was dominated by speculation that risks undermining the government’s hard-won fiscal credibility.

The background to this was a slightly greater-than-expected increase in unemployment to 5%.

Unemployment in the UK has continued to rise, reaching 5% in September

Source: LSEG Datastream

• Doubt over “hard choices”: Chancellor Rachel Reeves has successfully anchored gilt yields by maintaining a stern rhetoric of fiscal prudence and signalling a willingness to make “hard choices.” The market appraisal of this restraint is fragile, relying entirely on the assumption that the government will deliver sufficient revenue-raising measures to plug the estimated £30 to £40 billion fiscal shortfall against its fiscal rules.
• The U-turn briefing: press reports last week indicated that the chancellor may feel she has to revisit plans to increase headline income tax rates due to internal political pressure. Instead, the final Budget is expected to rely on a complex mix of ‘stealth taxes’, such as extending the freeze on tax thresholds (fiscal drag) and targeting wealth through adjustments to capital taxes.
• Market risk: there are a couple of reasons to be concerned about this. Currently, there are an estimated 1,100 tax reliefs in the UK. These undermine the concept of tax neutrality, meaning that, when spending decisions are being made, government policy is tipping the scales in favour of one area or another.

This lack of tax neutrality risks causing inefficient allocation of resources. But also, if the final Budget’s numbers are perceived by bond investors to be based on unreliable future spending cuts or insufficient stealth taxes, the gilt market could react badly, resulting in a rise in the political risk premium and higher government borrowing costs.

Rumours of the existence of two Budgets (one with headline tax increases and one without) rattled the bond market, as did rumours of a leadership challenge within the government. The Starmer/Reeves combination may be under pressure politically but remains the ‘devil-you-know’ as far as the bond market is concerned.

Geopolitics: Fragile truce and structural de-risking

The U.S.-China trade dynamic remains an exercise in tactical de-escalation rather than fundamental peace, while Europe’s approach hardens.

A couple of weeks ago, we saw a thawing of relations, with a truce reached between the U.S. and China over trade. Investors realised it was temporary in nature, but last week, the concerns were for how complete the agreement was, specifically in relation to Chinese purchases of U.S. soybeans. These commitments have not been officially recognised on the Chinese side, and purchases don’t seem to have resumed.

Meanwhile in Europe, European Commission President Ursula von der Leyen expressed the region’s commitment to “de-risking” it’s relationship with China. This strategy led to the official anti-subsidy probe into Chinese Battery Electric Vehicles (BEVs) and the activation of new trade defence mechanisms like the Anti-Coercion Instrument (ACI). It creates a long-term headwind for Chinese exporters and accelerates the trends of supply chain diversification and global fragmentation.

Risk assets: Rotation into resilience

The combination of geopolitical tension, economic cooling, and valuation concerns triggered a clear shift to risk aversion last week, with investors rotating out of speculative growth and into assets offering stability and structural tailwinds.

• Tech sell-off: global equities experienced a pullback, led by the previously market-leading technology sector. The Nasdaq Composite gave back a fraction of recent gains as investors engaged in profit-taking, questioning the lofty valuations of AI-linked stocks and pricing in slower economic growth. This sector weakness comes at a time when RBC’s technical analyst noted the breadth of the market has been showing signs of improving, which is usually a good sign. 
• Defensive sectors: this increased breadth was reflected more explicitly in defensive sectors like healthcare, utilities, and industrials. These outperformed, finally enjoying some benefit from their more predictable earnings, attractive dividend yields, and the long-term investment required for reshoring and supply chain diversification.

Coming up

• Earnings season ends with a bang: Nvidia reports its third quarter earnings.
• Fed’s thoughts: the minutes of the Fed meeting on 28 and 29 October will be released. Opinions on monetary policy outlook are unusually split.
• Return to work: U.S. federal employees will return to work and gradually start to collect and release data on how the economy is performing.

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