Europe markets head into midweek with inflation, trade, and growth all in focus.
UK price data surprised to the downside, strengthening the case for an imminent Bank of England rate cut and moving sterling and equities in opposite directions.
Elsewhere, Washington and Bern edged closer on trade, the EU pushed ahead with tougher carbon border rules, and fresh data out of Germany highlighted how fragile the region’s economic recovery remains as 2025 approaches.
UK posts unexpected inflation numbers
UK inflation cooled sharply to 3.2% in November, its lowest level since March, down from 3.6% in October and comfortably below the 3.5% forecast.
The drop was driven by cheaper food items such as cakes, biscuits, cereals, and tobacco, along with lower prices for women’s clothing.
That combination has strengthened expectations that the Bank of England will cut rates to 3.75% on Thursday.
Services inflation slipped to 4.4%, while core CPI fell to 3.2%, pointing to easing price pressures as the labor market continues to soften.
Markets are now pricing in more than a 90% chance of a quarter-point cut, with a tight 5-4 MPC vote widely expected as Governor Bailey looks ahead to further disinflation.
Sterling slid on the news, while the FTSE 100 bounced back, helped by gains in banking stocks.
BoE forecasts still see inflation staying above 2% until mid-2027, though recent budget measures could bring that timeline forward.
US-Swiss ‘tariff’ deal
The US Trade Representative has confirmed key tariff details under a framework trade deal with Switzerland and Liechtenstein, applying retroactively from November 14.
Under the agreement, tariffs on imports are now capped at the higher of the most-favored-nation rate or 15%, a big step down from the previous 39%.
The changes cover a wide range of goods, including agricultural products, aircraft parts, and generic medicines, while exemptions remain in place for pharmaceuticals, chemicals, gold, and coffee.
As part of the deal, Swiss companies have committed to investing $200 billion in the US by 2028, focusing on areas like pharmaceuticals, medical devices, aerospace, and gold manufacturing.
The two sides are aiming to finalize the full agreement by March 31, 2026, with a review of tariffs on the table if talks fall short.
EU to enhance carbon border tariff
The European Union is set to widen its Carbon Border Adjustment Mechanism (CBAM), the world’s first carbon border tariff, to cover a much broader range of products.
That includes car parts, washing machines, refrigerators, construction materials, power grid components, and machinery, all downstream goods that rely heavily on steel and aluminum.
The draft proposals, published by the European Commission on December 17, are designed to close loopholes ahead of full CBAM charges kicking in from January 2026 on imports such as steel, cement, and fertilizers.
To stop companies from gaming the system, the EU plans to apply “default” emissions values to foreign firms that under-report their carbon footprint, with a particular eye on exporters from China.
The goal is to prevent producers from sending low-carbon goods to Europe while keeping high-emission production elsewhere.
While the policy has drawn criticism from countries including China, India, and South Africa for being protectionist, the EU says the levy is aimed squarely at limiting carbon leakage and keeping costs aligned with EU carbon prices.
Around 25% of the revenue will be funneled into Europe’s low-carbon transition, with proceeds expected to reach €2.1 billion by 2030.
German business confidence takes a hit
German business confidence took an unexpected step back in December, with the Ifo Institute’s business climate index slipping to 87.6 from a revised 88.0 in November.
That came in below expectations for a modest uptick to 88.2.
Companies’ views on current conditions held steady at 85.6, but sentiment around the outlook for early 2026 darkened, with expectations falling to 89.7, the weakest reading since May.
The pullback was broad-based, hitting manufacturing, services, and trade, while construction remained stuck at a low level.
Ifo President Clemens Fuest summed it up bluntly, saying there was little sign of optimism as the year drew to a close.
The figures underscore how Germany’s recovery has stalled, following two years of economic contraction and only tepid growth expected in 2025.
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