5 things to start your day: Europe

Good morning. There's growing optimism interest rates are coming down. French tax hikes loom. And UK business chiefs are losing confidence i

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Good morning. There's growing optimism interest rates are coming down. French tax hikes loom. And UK business chiefs are losing confidence in the economy. Here's what people are talking about.

Easing feeling

A consumption-driven UK recovery could revive inflation, but more interest rate cuts are likely with prices "moving in the right direction," Bank of England policymaker Megan Greene said. Greene, an external member of the BOE's Monetary Policy Committee, said she was watching for signs of companies raising prices as the economy gathers steam and that a robust consumer could be the trigger. Meanwhile Christine Lagarde said the European Central Bank is becoming more optimistic that it will be able to get inflation under control. Her comments come ahead of preliminary euro-area inflation figures which will likely show the rate of price gains slowing below the ECB's 2% target for the first time since 2021. In the US, Federal Reserve Chair Jerome Powell said the central bank will lower interest rates "over time," while again emphasizing that the overall US economy remains on solid footing. Powell also reiterated his confidence that inflation will continue moving toward the Fed's 2% target. Read on for Ed Harrison's view on Powell's comments.

French tax plan

French Prime Minister Michel Barnier plans to announce additional taxes to raise between €15 billion and €18 billion ($16.7-$20 billion) as he looks at ways to regain control of the country's public finances, according to Le Parisien newspaper. He will also delay a target to bring the budget deficit within the European Union ceiling of 3% of output by two years until 2029, the paper said, without identifying the source of the information. The French Finance Ministry declined to comment. Barnier is due to face parliament for the first time as prime minister on Tuesday to outline how he plans to rein in public finances while navigating bitter divisions between lawmakers. According to Le Parisien, Barnier plans to triple an exceptional contribution on top earners to raise €3 billion and impose an extra tax on companies worth €8 billion.

Debt deals

Goldman Sachs has executed more than £1 billion ($1.3 billion) of trades in Thames Water's bonds in September, as it makes a market between original investors exiting the beleaguered utility and opportunistic players scooping up the debt at a discount. Hedge funds and distressed funds are continuing to bid for the debt of the UK's largest water provider, said dealers at the US bank in a note to clients seen by Bloomberg. Around £3 billion of bonds have changed hands in total this month, according to the note. The trading comes as the company has kicked off talks with creditors while it struggles to raise equity.  And BlackRock is set to become the largest shareholder in SellerX as part of a deal to slash the former unicorn's debt load, according to people familiar with the matter. BlackRock, an existing lender to the Berlin-based firm, will take a stake in the business as part of a debt-for-equity swap and refinancing, the people said.

Losing confidence

Business chiefs are the most pessimistic they have been about Britain's economy since late 2022, when the country was still reeling from the effects of Liz Truss's short spell as prime minister. The Institute of Directors said Tuesday that the fear of looming tax hikes and workplace regulations, expected to be brought in by the UK's new Labour government, had contributed to the drop in its monthly economic confidence index. The survey records the percentage difference in respondents who say they're pessimistic about the economy against those who say they're optimistic. It was minus 38% in September, having tumbled since July when more directors said they were optimistic than pessimistic in the aftermath of Labour's general election victory.

Trump vs Harris

On the stump across America, Donald Trump and Kamala Harris offer strikingly different visions of the economy they'd seek to build. On Planet Trump, US tariff barriers are higher — and corporate tax rates lower — than they've been in decades, while oil drillers roam the land and illegal immigrants are shipped out. In Harrisworld, parents and homebuyers have access to new pots of public cash, grocers have to think twice before jacking up food prices, and companies get dinged if they funnel profits to shareholders via buybacks. Fully implemented, Trump's tariff plan would essentially end US-China trade, according to analysis by Bloomberg Economics, while his proposed border crackdown and deportations could knock more than 3% off GDP by the 2028 election. Harris' proposals are more modest, but show a willingness for the government to wade into markets, from real estate to retail.

Coming up

Tuesday's economic calendar includes September manufacturing PMIs in Germany, the UK, the Eurozone and the US, as well as the Eurozone CPI. The US will also get September ISM manufacturing and the August JOLTS report. Central bank speakers include the ECB's Guindos, Nagel, Schnabel and Rehn, the BOE's Pill and the Fed's Bostic. Will corporate bonds benefit from the growing appetite for risk? Is now a good time to buy high-grade bonds, or the junkiest of junk? Share your views in a short MLIV Pulse survey.

What we've been reading

This is what's caught our eye over the past 24 hours. Israel says it has begun 'targeted' ground raids in Lebanon Berkshire plans new yen bond sale in boost to trading houses Stanford, USC banned from giving leg up to legacy students Jeep owner Stellantis warns of fire risk in 200,000 plug-in SUVs Michael Dell unloads $1.2 billion in second big Dell stock sale UK's Berry Bros & Rudd extends into the wine auction business

And finally, here's what Ed is interested in this morning:

While Fed Chair Jerome Powell broke little new ground at a Nashville meeting of the National Association for Business Economics on Monday, clearly the market was disappointed as near-term yields rose on the prospect of fewer rate cuts. The jobs report takes on more significance now to put a 50-basis-point rate cut back in play. Powell made two statements, which demonstrated the market has been pricing in more cuts than the Fed is presently willing to deliver. First, he spoke of the Fed not being in a hurry to cut rates. And while yields across the curve rose, yields on two-year Treasuries rose the most. Powell noted that projections show another two 25-basis-point cuts if the economy performs as expected. That seemingly rules out market expectations for a larger reductions — something only likely if the labor market deteriorates more from here, as Atlanta Federal Reserve President Raphael Bostic noted earlier in the day. Interest rate swaps have removed more than 10 basis points of rate-cut expectations through May on the two comments. And that puts even more weight on Friday's jobs report for September. A weak report will put a larger cut back in play, which would cause the market to rally. But in-line or upbeat data will cause the market to sell off, pricing out any big rate moves. Edward Harrison writes for Bloomberg's Everything Risk column as well as the Markets Live blog, based in Washington.

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