Will UK inflation climb back above the BoE’s target?

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UK inflation data on Wednesday will provide the latest clues for investors on the likely timing and speed of interest rate cuts by the Bank of England.

Economists polled by Reuters expect the figures to show that consumer price inflation climbed to 2.2 per cent in October, up from 1.7 per cent in September and back above the BoE’s 2 per cent target.

Energy prices are behind the expected rise, after the Ofgem price cap on household bills rose 9.5 per cent last month.

However, policymakers at the BoE pay special attention to services inflation, a measure of underlying price pressures, which remained elevated at 4.9 per cent in September.

The BoE expects services inflation to have picked up again to 5 per cent in October, but a sharper rise could encourage the central bank to lower rates more slowly in the coming months. 

Since cutting rates by a quarter percentage point to 4.75 per cent earlier this month, the BoE has said that “a gradual approach to removing policy restraint” remained appropriate.

“Consumer services inflation is easing only gradually, with a more substantial fall in services inflation not likely until next year,” it explained. BoE governor Andrew Bailey has said that increased uncertainty about the affect of some of the measures contained in the Autumn Budget, such as the increase in national insurance paid by employers, also supported this gradual approach.

Despite the UK economy barely growing in the three months to September, markets expect the BoE to keep rates on hold in December before it cuts them again by a quarter of a percentage point in February. Valentina Romei

Will Eurozone data influence the pace of rate cuts?

A second term for Donald Trump in the White House has darkened the outlook for the Eurozone economy, as analysts and investors consider the impact of promised tariffs.

But the bloc’s economy was already struggling with an industrial downturn and sluggish growth that has raised expectations of deeper interest rate cuts by the European Central Bank.

On Friday, flash purchasing managers’ indices for the bloc will provide another economic snapshot. Economists polled by Reuters expect the manufacturing sector to stay rooted in negative territory at 46, below the 50 level that separates expansion from contraction. The services sector is expected to weaken fractionally to 51.5.

Overall, they expect the composite measure — which combines services and manufacturing — to remain stagnant at 50.

Weaker numbers would put pressure on the ECB to consider faster rate cuts to support the bloc’s economy. Currently, trading in swaps markets imply investors expect at least a quarter-point cut at next month’s meeting, from the current 3.25 per cent deposit rate, with a broadly one-in-three chance that the ECB will go for a bigger half-point cut.

The euro is sitting at a one-year low having sold off since the US election as investors bet that the president-elect’s tariff and tax policies would encourage the ECB to cut more aggressively, and the Federal Reserve less aggressively.

But making the counterargument is inflation, which rose to 2 per cent last month, meeting the ECB’s target and strengthening the case for a slower path of easing. Ian Smith

Will US small-caps hit a record high?

Shares in smaller US companies were some of the biggest beneficiaries of the initial wave of investor optimism that followed Trump’s victory in the November 5 presidential election.

Traders will be watching closely this week to see whether the enthusiasm can be sustained, or if worries about inflation and interest rates will drag prices lower again.

While large-cap indices such as the S&P 500 have already set dozens of records this year, the Russell 2000 — the most closely watched small-cap index — has yet to regain the high it hit in late 2021. Last week it came within 1 per cent of the record before tumbling back.

Small-caps encapsulate many of the debates around the economic impact of a second Trump presidency. On the one hand, bulls believe the domestic bias of his policies gives them more to gain from potential corporate tax cuts. The Russell 2000 is also heavily weighted towards bank stocks, which are hoping to benefit from a wave of deregulation and increased receptivity to mergers.

At the same time, economists and some high-profile bond investors have warned that Republican policies could stoke inflation and force the Fed to slow or even reverse its plans for further rate cuts. Small-cap companies tend to have higher levels of floating rate debt, making them vulnerable to rate rises.

Jill Carey Hall, an equity and quant strategist at Bank of America, said in a note on Friday that small caps were still relatively undervalued compared with larger stocks. However, she cautioned that “lots of optimism” had recently been priced in, while more fundamental factors like earnings growth have disappointed. Nicholas Megaw