Will UK inflation rise again above the BoE target?

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UK inflation data on Wednesday will give investors the latest clues about the timing and pace of interest rate cuts by the Bank of England.

Economists polled by Reuters expect consumer price inflation to rise to 2.2% in October from 1.7% in September, exceeding the BoE's 2% target.

Energy prices have lagged expected increases after the Ofgem price cap on household bills rose 9.5% last month.

But BoE policymakers are paying particular attention to services inflation, a measure of underlying price pressures, which remained high at 4.9% in September.

The BoE expects services inflation to rise again to 5% in October, but a sharper rise could lead the central bank to cut interest rates more slowly in coming months.

After cutting interest rates by a quarter of a percentage point to 4.75% earlier this month, the BoE said a gradual approach to lifting policy restrictions was still appropriate.

Consumer services inflation is gradually easing and a further decline in services inflation is unlikely until next year, he explained. BoE Governor Andrew Bailey said this gradual approach was also supported by increased uncertainty about the impact of some measures included in the autumn budget, such as the increase in national insurance premiums paid by employers.

Despite the UK economy growing little in the three months to September, markets expect the BoE to keep interest rates unchanged in December and then cut them again by 0.4 percentage point in February.Valentina Romay

Will Eurozone data affect the pace of interest rate cuts?

Donald Trump's second term in the White House has clouded the outlook for the euro zone economy as analysts and investors consider the impact of promised tariffs.

However, the bloc's economy is already suffering from an industrial downturn and slowing growth, raising expectations of further interest rate cuts from the European Central Bank (ECB).

On Friday, the block's flash Purchasing Managers' Index will provide another economic snapshot. Economists polled by Reuters expect the manufacturing sector to remain in negative territory at 46, below the 50 level that separates expansion from contraction. The services sector is expected to weaken slightly to 51.5.

Overall, they expect the composite index combining services and manufacturing to remain stagnant at 50.

Weaker numbers will put pressure on the ECB to consider faster interest rate cuts to support the bloc's economies. Current swap market trading suggests investors expect at least a quarter-point cut from the current 3.25% deposit rate at next month's meeting, with roughly a one-in-three chance the ECB will cut it by a larger half-point. chop.

The euro fell to its lowest level in a year after the U.S. election as investors bet that the president's tariff and tax policies will lead the ECB to cut rates more aggressively and the Federal Reserve to cut rates less aggressively.

But the counter-argument is that inflation rose to 2% last month, hitting the ECB's target and strengthening the case for a slower easing path. Ian Smith

Will U.S. small-cap stocks hit record highs?

Stocks of small U.S. companies have been some of the biggest beneficiaries of the initial wave of investor optimism following Trump's victory in the November 5 presidential election.

Traders will be watching closely this week to see if the enthusiasm can persist, or if concerns about inflation and interest rates will push prices lower again.

While large-cap indices like the S&P 500 have already set dozens of records this year, the Russell 2000, the most popular small-cap index, has yet to recover from the highs it hit in late 2021. Last week it was within 1%. Record before falling again.

Small-cap stocks encapsulate much of the debate about the economic impact of a second Trump presidency. On the one hand, the bulls believe his policies are more domestically biased, allowing him to benefit more from a potential corporate tax cut. The Russell 2000 also has heavy weighting on bank stocks, which hope to benefit from deregulation and increased receptivity to mergers.

At the same time, economists and some prominent bond investors have warned that Republican policies could stoke inflation, forcing the Federal Reserve to delay or even cancel plans for further interest rate cuts. Small and medium-sized businesses tend to be vulnerable to interest rate increases due to their high level of variable interest rate debt.

Jill Carey Hall, equity and quantitative strategist at Bank of America, said in a note Friday that small-cap stocks remain relatively undervalued compared to large-cap stocks. But she cautioned that while much of the recent optimism has been priced in, more fundamental factors such as earnings growth have been disappointing. Nicholas Megaw

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