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Markets have been forced to overhaul their expectations in recent weeks, and investors are likely to be keeping an eye on Thursday's European Central Bank meeting for the outlook for euro zone interest rates.
The ECB is now overwhelmingly expected to cut interest rates on its main savings scheme by 0.25 percentage points to 3.25% at its two-day meeting in Frankfurt. However, this outlook is in sharp contrast to the consensus after the September meeting.
The central bank last month opted to cut borrowing costs to 3.5% for the second time this year. However, there was a firm consensus among economists that prices would stabilize in October and rise again only in December.
That view changed after a steady trickle of weak economic indicators in the region pointed to a contraction in economic activity, particularly in Germany, its largest economy.
Inflation in the euro area fell more than expected to 1.8% in September, the lowest level in more than three years and below the ECB's medium-term target of 2.0%. Germany's economy is likely to contract for several consecutive years in 2024, the longest slump in more than 20 years, according to government forecasts.
The ECB is now expected to cut rates by another 0.25 percentage point in December, followed by several cuts of the same size early next year. Economists expect interest rates on the ECB's main deposit facility to fall to around 2% by next summer.
However, markets will also need to adapt to changes in the ECB's communication strategy on Thursday. RBC Capital Markets told clients that the central bank is “emphasizing a meeting-by-meeting approach and stressing that rates will remain restrictive for the foreseeable future,” but that interest rates are now at “more neutral levels.” He said he points out that the country is on track to move toward that direction. Olaf Storbeck
Will UK inflation fall below the central bank's target?
Wednesday's UK inflation figures are likely to be a deciding factor in whether the Bank of England accelerates the pace of rate cuts this year.
Economists polled by Reuters said annual headline inflation fell to 1.9% in September from 2.2% in August and July as lower oil prices eased pressure on motor fuel prices. I predict that will happen.
This means headline inflation has fallen below the Bank of England's long-term target of 2% for the first time since April 2021. Bank of England Governor Andrew Bailey said this week that the Bank of England's interest rate setters “could… “If inflationary pressures continue to subside, we will be a little more aggressive in lowering borrowing costs.”
However, economists and investors are likely to focus on inflation in the services sector, a key part of the UK economy. Services inflation accelerated to 5.6% in August from 5.2% in July, but analysts expect it to fall to 5.3% in September.
Investec economist Ellie Henderson said the decline in services inflation was likely due to lower prices for restaurants, hotels, airfare and private schooling.
Trends in services will help shape inflation expectations for the rest of the year. Economists including the Bank of England expect headline inflation to rise to 2.5% by the end of the year.
But Mr Henderson warned that if the slowdown in price growth was mainly due to temporary factors such as airfares and fuel prices, “congratulations on inflation could be postponed for several more months”. Valentina Romay
Will U.S. consumer activity accelerate?
Investors' attention has shifted to data tracking consumer behavior after the Federal Reserve said its interest rate cuts are being driven by economic strength rather than price pressures.
Traders are keeping an eye on Thursday's release of September retail sales figures to see whether consumer spending strengthens further following August's unexpected 0.1% month-on-month increase. . The headline rate, which excludes auto sales, a typically volatile figure, will rise by 0.4% or 0.25%, according to forecasts compiled by FactSet.
The market, which had been hoping for a series of rapid interest rate cuts from the Federal Reserve by the end of the year, was dealt a big blow after September's strong jobs report showed the resilience of the U.S. economy.
Leslie Falconio, chief investment officer at UBS Asset Management, said: “I think retail sales and consumers will continue to be the drivers (of market interest), but the pressure will ease given the strong employment data.'' “There is,” he said.
However, Thursday's report may have been skewed by Hurricane Helen, which hit the southeastern United States late last month. Analysts have warned that storm-inspired headline numbers could pose problems in tracking underlying trends in the data over several months, with 10 Parsing the moon's numbers is also expected to be difficult.
“We expect the next few weeks to be difficult in accurately assessing the impact of recent developments on the real economy,” Ian Lingen of BMO Capital Markets told clients.
“Retail sales, consumer spending, GDP, and even payroll data could be distorted by the storm and subsequent recovery efforts.” jennifer hughes
