Insights 
VT 
In July, the UK economy showed no growth in its monthly GDP, aligning with expectations. Previous figures had shown a 0.4% increase.
The services sector grew by 0.1% when a stagnation was anticipated, slightly better than the previous 0.3% growth. However, industrial output fell by 0.9%, missing expectations of no change, while it had previously grown by 0.7%.
Manufacturing Output Decline
Manufacturing output saw a decline of 1.3%, contrary to expectations of zero growth, after a prior increase of 0.5%. Construction output increased by 0.2%, surpassing expectations of a 0.2% decline, though it was previously up by 0.3%.
Concerns linger over possible stagflation risks, primarily due to fragile fiscal conditions and persistent price pressures. The Bank of England remains vigilant in response to these economic indicators.
The flat GDP figure for July confirms the UK economy has hit a wall. While services provided a tiny bit of support, the sharp downturns in industrial and manufacturing output show the productive side of the economy is in reverse. This data reinforces the stagflation narrative we have been monitoring for months.
Given this, we see further weakness in the British Pound as the most direct trade. With the latest August inflation data recently coming in at a stubborn 4.1%, the Bank of England is trapped and cannot signal rate cuts to stimulate growth. We should consider buying put options on GBP/USD, anticipating a slide towards levels we haven’t seen since the turmoil of late 2022.
Impacted UK Equities
We also expect UK-focused equities to suffer, particularly in the FTSE 250 index. The latest retail sales figures for August already showed a 1.5% year-on-year decline, and this weak GDP report will only worsen investor sentiment for domestic companies. Selling FTSE 250 futures seems like a logical hedge against a deteriorating consumer and industrial backdrop.
Interest rate markets will remain on edge, creating opportunities in short-term interest rate (STIR) derivatives. After the aggressive rate hikes through 2023 and 2024 that brought the Bank Rate to 4.5%, the market is now uncertain about the next move. We believe the Bank of England will be forced to sound hawkish to fight inflation, meaning we can position for yields to remain elevated for longer than currently priced.
Overall, the key theme for the coming weeks is heightened volatility. The conflict between a stagnant economy and persistent inflation leaves little room for clear policy direction from the government or the central bank. Buying straddles or strangles on major UK assets ahead of the next BOE meeting could be a prudent way to trade the expected uncertainty.
