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What will the Fed minutes say about the path for US interest rates?

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Investors will be watching the release on Tuesday of the Federal Reserve’s minutes from its November meeting because they should offer insight into the deliberations officials have had about whether the US central bank should raise interest rates again this year. 

The Fed at its meeting in November chose to continue to hold interest rates at a range of 5.25-5.5 per cent after last increasing them in July. This was the second meeting in a row at which the Federal Open Market Committee opted to not raise interest rates, as officials watch inflation data for signs that monetary policy is sufficiently tight. 

Chair Jay Powell said in his press conference after the meeting that good economic data — such as recent evidence of strength in the labour market and robust consumer spending — may mean the Fed will have to act further to meet its 2 per cent inflation target. But since then, the US reported that headline inflation rose less than expected in October to 3.2 per cent. Tuesday’s data was also lower than the 3.7 per cent rise in September and the first decline in four months. 

The inflation data has cemented expectations among traders that the Fed has finished raising interest rates. In recent days, traders in the futures market have even pulled forward expectations of interest rate cuts to May 2024. Kate Duguid

How much will Europe’s business climate rebound?

Investors will be watching for any nascent signs of a rebound in Europe’s stagnant economy on Thursday when the latest survey of purchasing managers is published.

The report is expected to show a slight improvement in the business climate this month, which could indicate that conditions have started to bottom out, even if it seems certain to signal that activity is still contracting.

Economists polled by Reuters expect S&P Global’s composite eurozone purchasing managers’ index to rise to 47, up from 46.5 the previous month. While mildly encouraging, such a reading will still be well below the critical 50 mark that separates growth from contraction.

The results were “likely to reflect a moderate improvement in both manufacturing and services from current low levels”, Andreas Rees, an economist at Italian bank UniCredit, said in a note to clients. “The manufacturing index may have bottomed out as the pace of order contraction has slowed.”

Last month’s PMI survey pointed to an easing of price pressures and investors will be looking for more evidence that eurozone inflation will continue to decline after it fell to more than a two-year low of 2.9 per cent in October.

Lower inflation, combined with continued strong wage growth, is a big reason why the European Commission, the EU’s executive arm, expects robust consumer spending to deliver a return to growth in the eurozone from the fourth quarter of this year. Martin Arnold

How much wriggle room will the public finances data give the UK chancellor?

Investors’ attention will be focused on the UK public finances next week with October’s data published just one day ahead of the Autumn Statement, in which chancellor Jeremy Hunt will announce measures aimed at revitalising a struggling economy.

Economists polled by Reuters expect public sector borrowing, published on Tuesday, to come in at £13.7bn in October, much lower than the £20.3bn forecast in March by the Office for Budget Responsibility, the UK fiscal watchdog.

This would mean more wriggle room for the chancellor than that accumulated in the financial year so far. Between April and September borrowing was £81.7bn, compared with a forecast of £101.5bn by the OBR, a difference largely explained by additional revenue on the back of high inflation. This has raised expectations that the chancellor will cut taxes in the Autumn Statement on Wednesday ahead of the election next year.

However, the OBR, which publishes updated forecasts on Wednesday alongside the fiscal statement, is expected to downgrade its economic outlook. Its optimistic March forecast of 1.8 per cent expansion in 2024 and 2.5 per cent in 2025 is likely to be slashed to something more in line with the no growth predicted by the Bank of England for the next two years.

Higher interest rates will also add to predicted debt servicing costs.

Ellie Henderson, economist at wealth manager Investec said: “Chancellor Hunt may have some headroom to play with now, but as the economy deteriorates — we expect the economy to be in a recession over this winter — it is unlikely to be there for long.”

A reminder of the difficult UK economic situation will come from the S&P purchasing managers’ indices, a measure of business activity published on Thursday. This is expected to show that activity contracted for the fourth consecutive month in November. Valentina Romei

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