With the US election behind us, investors will probably shift their focus back to concrete economic data, such as the consumer price index for October, due on Wednesday. And when they do, it’s likely worth considering how the president-elect’s proposed policies might affect things going forward.
US inflation eased to just 2.4% in September from a year ago – marking its sixth consecutive month of declines. Economists anticipate a slight increase in inflation, one that’s unlikely to prompt much reaction from the Federal Reserve, which has been working toward price stability over the past two and a half years. What may keep the Bank’s policymakers watchful is the possibility of a more significant rise in inflation next year if the president-elect follows through on the trade policies discussed during the campaign.
That could result in a 10% minimum tariff on all imports and a 60% tax on all goods coming from China. According to calculations from Barclays, the measures would amount to an import-weighted average tariff of 17% – a lofty level not seen since 1935. This would likely result in higher prices for American consumers. However, faster inflation poses a significant threat to the economy, potentially leading to a new round of interest rate hikes or, at the very least, higher rates for a longer period.
On the calendar
- Tuesday: UK labour market report (September). Earnings: Shopify, Spotify, Home Depot.
- Wednesday: US inflation (October). Earnings: Cisco.
- Thursday: Eurozone industrial production (September), minutes of the European Central Bank’s latest meeting. Earnings: Disney, Applied Materials, JD.com.
- Friday: Japan economic growth (Q3), China industrial production and retail sales (October), UK economic growth (Q3), US retail sales (October), US industrial production (October). Earnings: Alibaba.
What you might’ve missed last week
US
- Stocks hit new highs and the US dollar rallied as election uncertainty faded away.
- The Fed lowered borrowing costs for the second time this year.
Europe, the Middle East, and Africa
- The Bank of England (BoE) delivered another interest rate cut.
- OPEC+ again delayed a plan to begin raising oil production.
UK
- Growth in activity among British construction firms slowed to a 10-month low in October, with house-building declining for the first time since June.
- UK power prices surged to their highest levels in nearly a year.
- Regulatory authorities have conditionally approved the £15 billion ($19.5 billion) merger between Vodafone and Three, provided the companies commit to a large-scale upgrade of the UK’s mobile network.
- UK-based chip company Arm shared a lower-than-expected sales forecast.
- AstraZeneca shares saw their steepest drop since 2020 amid rising concerns over a Chinese investigation into the UK drugmaker.
Why it matters
US stocks and bitcoin hit all-time highs, while the greenback and bond yields saw big jumps on Wednesday, as investors bet on the president-elect’s talk about tax cuts, tariffs, and deregulation. Shares in some emerging markets, meanwhile, declined. Commodities also headed lower, which is unsurprising since they’re priced in dollars and the greenback’s surge makes them more expensive for international buyers.
The Fed delivered its second interest rate cut of the year – this one more modest than the last – with inflation continuing to ease. The central bank said that despite some signs of weakening in the job market, the overall strength of the US economy is allowing it to take a go-slow approach to shrinking interest rates while it watches for any new flare-ups in inflation. And that’s the approach traders are betting on: they see the Fed’s key rate declining by just one percentage point by the end of 2025.
The BoE also cut borrowing costs for the second time this year. The decision wasn’t altogether surprising, with UK inflation falling to a three-year low in September. But the Bank warned last week that inflation could well warm up again, potentially rising by as much as half a percentage point more, thanks to spending increases in the government’s latest budget. On the flip side, the budget could boost economic output by 0.75% in a year’s time, the BoE said. And the prospect of slightly higher inflation alongside a stronger economy has left the central bank feeling cautious about cutting rates too forcefully: it said it likely won’t reduce them again until next year.
In its ongoing bid to revive oil prices, OPEC+ has announced a series of production curbs since 2022. And while the group of the world’s biggest oil-producing countries had been planning to open the taps a tad in December, it announced last week that it would delay the move by a month. That was the second postponement in a row, driven partly by weak demand in China and flowing oil supply from the US, both of which are creating a glut in the crude market.
October saw UK construction growth slow to a 10-month low, with house-building dipping below the growth threshold as pre-budget uncertainties and rising borrowing costs weighed on the sector. Similarly, the services sector posted its weakest growth in 11 months, pressured by inflation and higher wage demands that dampened business confidence. The recent budget raised taxes and social security contributions, heightening concerns about decreased consumer spending and slower employment growth. The BoE’s recent interest rate cut to 4.75% may help mitigate the slowdown by reducing borrowing costs.
UK power prices rose to their highest levels in nearly a year, driven by low wind generation and reliance on European imports, highlighting ongoing energy challenges. The government’s plans to reduce foreign dependency and transition to domestic renewable sources are still in progress.
On the corporate front, the £15 billion merger between Vodafone and Three awaits final approval, contingent on the companies’ commitment to upgrade the UK’s mobile network. The merger could significantly enhance the nation’s digital infrastructure by increasing competition and improving service quality.
In contrast, UK-based Arm Holdings reported weaker-than-expected sales forecasts due to sluggish smartphone demand, tempering growth prospects despite its strong position in AI. Meanwhile, AstraZeneca’s shares saw a sharp decline following reports of a Chinese investigation into its business practices, eroding investor confidence. The probe, focusing on aggressive sales tactics in China, reflects mounting regulatory pressure on UK companies operating overseas.
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