In September, UK business activity experienced its slowest growth in five months as companies and consumers delayed substantial spending decisions. This hesitation was due to the anticipated tax rises in November’s budget.
The S&P Global Purchasing Managers’ Index for the services sector fell to 50.8 from 54.2 in August, marking the lowest point since April. The composite PMI also dipped to 50.1, marginally above the threshold separating growth from contraction.
Economic and Political Uncertainty
Many businesses paused spending decisions, awaiting the Autumn Budget, while consumers were cautious about major purchases. This hesitation resulted from economic and political uncertainty impacting the service sector.
Finance minister Rachel Reeves is expected to present the budget on November 26, and it may involve tax increases or spending cuts. This follows last year’s increase in social security contributions which began in April.
S&P noted services businesses had reduced jobs continuously for 12 months, although cost increases had slowed. Signals of a softening labour market and easing inflation pressures influence the Bank of England’s policy debate. Policymakers are divided on rate cuts given the potential temporary rise in inflation near the bank’s target.
Economic Slowdown and Market Reactions
The recent drop in the UK composite PMI to 50.1, the lowest since April, signals a clear economic slowdown ahead of the winter. With the November 26th budget creating uncertainty, we should consider defensive positions. The domestic-focused FTSE 250 index has already fallen 4% in the last quarter, reflecting this nervousness among investors.
We expect the Bank of England to adopt a more dovish stance, given the easing inflation and job cuts mentioned in the survey. This makes further interest rate cuts more likely than hikes from the current 4% level, especially after rates were brought down from their 2023 peak of 5.25%. Consequently, we see potential for further weakness in the British Pound, which has already slipped to around 1.19 against the dollar in the past month.
Traders should look at buying put options on the Pound against the US dollar or the Euro, betting on a further decline into November. This strategy provides downside exposure while capping the maximum loss to the premium paid for the option. These positions would benefit from both the expected economic weakness and a central bank hesitant to raise rates.
Given that companies are delaying spending, positioning for a drop in UK stock indices is a prudent move. We remember the market turmoil following the fiscal uncertainty of the “mini-budget” back in late 2022, and the theme of a challenging budget is re-emerging. Buying put options on the FTSE 250 index with expiry dates after the budget offers a direct way to speculate on this outcome.
The period leading up to the budget is likely to be choppy, regardless of the ultimate market direction. Implied volatility on sterling options has already climbed to a six-month high, showing the market is bracing for larger-than-usual price swings. Therefore, strategies that profit from this volatility itself, such as straddles on GBP/USD, could be effective for capturing a sharp move either way.
