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UK inflation data on Wednesday will offer insights for investors on the potential timing and pace of interest rate cuts by the Bank of England.
According to economists surveyed by Reuters, it is anticipated that consumer price inflation rose to 2.2 percent in October, up from 1.7 percent in September and surpassing the BoE’s 2 percent target.
The surge in energy prices, following a 9.5 percent increase in the Ofgem price cap on household bills last month, is the main reason for this expected rise.
However, the BoE closely monitors services inflation, an indicator of underlying price pressures, which remained high at 4.9 percent in September.
The BoE foresees services inflation increasing to 5 percent in October, but a more significant uptick could influence the central bank to proceed with rate cuts at a slower pace in the upcoming months.
After reducing rates by a quarter percentage point to 4.75 percent earlier in the month, the BoE stated that a gradual approach to easing policy restraint was still suitable.
“Consumer services inflation is gradually decreasing, and a substantial decline is not expected until next year,” the bank explained. BoE governor Andrew Bailey mentioned that the increased uncertainty surrounding certain measures in the Autumn Budget, such as the rise in national insurance contributions by employers, also supports this gradual approach.
Despite the UK economy experiencing minimal growth in the third quarter of the year, markets anticipate that the BoE will maintain rates in December before implementing another quarter-point cut in February. Valentina Romei
Will Eurozone data impact the pace of rate cuts?
A potential second term for Donald Trump as US President has cast a shadow over the Eurozone economy, as analysts and investors evaluate the implications of promised tariffs.
However, the bloc was already grappling with an industrial downturn and sluggish growth, leading to expectations of deeper interest rate cuts by the European Central Bank.
On Friday, flash purchasing managers’ indices for the Eurozone will provide additional economic insights. Economists surveyed by Reuters anticipate that the manufacturing sector will remain in negative territory at 46, below the threshold of 50 that separates expansion from contraction. The services sector is predicted to slightly weaken to 51.5.
Overall, analysts expect the composite measure, which combines services and manufacturing, to stay steady at 50.
Weaker data could prompt the ECB to contemplate quicker rate cuts to support the Eurozone economy. Current trading in swaps markets suggests that investors anticipate at least a quarter-point cut at the next meeting, from the existing 3.25 percent deposit rate, with a one-in-three chance of a larger half-point cut by the ECB.
The euro has been trading at a one-year low since the US election, as investors anticipate that the president-elect’s policies on tariffs and taxes will prompt the ECB to adopt a more aggressive easing stance, while the Federal Reserve may ease less aggressively.
On the contrary, inflation rose to 2 percent last month, meeting the ECB’s target and strengthening the argument for a slower easing trajectory. Ian Smith
Will US small-caps reach a new high?
Smaller US companies were among the primary beneficiaries of the initial wave of optimism following Trump’s victory in the November 5 presidential election.
Market participants will closely monitor this week to see if the optimism can be sustained or if concerns about inflation and interest rates will weigh on prices once again.
While major indices like the S&P 500 have set numerous records this year, the Russell 2000, the prominent small-cap index, has yet to surpass the peak it reached in late 2021. Last week, it came within 1 percent of the record before retreating.
Small-cap stocks encapsulate many of the discussions regarding the economic impact of a potential second Trump administration. Optimists believe that the domestic focus of his policies could benefit them more from potential corporate tax cuts. Additionally, the Russell 2000 is heavily weighted towards bank shares, which are hopeful for deregulation and increased merger activities.
However, economists and some prominent bond investors have cautioned that Republican policies could fuel inflation and compel the Fed to slow down or even reverse its plans for further rate cuts. Small-cap firms typically have higher levels of floating-rate debt, making them susceptible to rate hikes.
Jill Carey Hall, an equity and quant strategist at Bank of America, noted in a Friday report that small caps are still relatively undervalued compared to larger stocks. Nevertheless, she warned that a lot of optimism has been priced in recently, while fundamental factors like earnings growth have been disappointing. Nicholas Megaw