🔍 The focus this week: US inflation

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. But economists suspect that the streak may have ended in October. They’re expecting a tiny uptick, one that likely won’t ruffle any feathers at the Federal Reserve (Fed), which has spent the past two and a half years fighting its way back to price stability. But what might keep the Bank’s policymakers on edge is the prospect of a much bigger acceleration in inflation next year if the president-elect goes ahead with the trade policies he touted on the campaign trail.

That would 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. Needless to say, that would lead to higher prices for American consumers. But faster inflation, of course, poses a serious threat to the economy and its job market – so it would have to be met by a fresh round of interest rate hikes to calm it. So if the Fed is thinking about doing a victory lap for its successful fight against the worst bout of consumer price increases in a generation, it might want to do it soon…

📅 On the calendar

• Monday: Nothing major.
• Tuesday: UK labor 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 US 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.

✍️ What does all this mean?

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.

Across the pond from the Fed, 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.