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3 Nov 2026 | 3 minutes to read
(All equity data is MSCI; all bond data uses ICE Bank of America indices unless otherwise stated; all data in sterling unless otherwise stated)
Chancellor John Healey delivered his Autumn Budget last week. His most pressing aim was to provide “breathing space” for households and businesses in the face of rising prices. Whether it can be successful in that aim will be debated in the months to come. But it has, for the time being, bought the government some breathing space. The bond market reacted calmly to a Budget which was small in scale, although large in terms of the number of individual measures announced. However, the chancellor has likely only deferred the more high-stakes decisions until next year’s Spending Review. If pressures stemming from the energy price shock and higher borrowing costs endure, the government will have to wrestle with some unpalatable decisions sooner or later.
To discover more, please follow the links below to our Budget commentary from last week:
Autumn Budget 2026: Rapid response video | TrinityBridge
Autumn Budget 2026: Key takeaways | TrinityBridge
While gilt yields fell over the latter half of last week following the Chancellor’s statement, a fiscal risk premium remains embedded. Greater evidence that the plan for deficit reduction can work will be required. However, UK government borrowing costs are also high because the Bank of England’s (BoE) policy rate has remained at 3.75% through 2026 to date. And because markets are currently pricing four to five rate hikes over the next 12 months. As recently as August, only two rate hikes were priced in. And prior to the outbreak of the Iran war in February, markets were expecting two rate cuts. Economists expect far fewer hikes than implied by market pricing; forecasting a mid-cycle adjustment rather than the start of a sustained path of monetary tightening. But much rests on the outcome of the conflict in the Middle East. The BoE’s rate-setting Monetary Policy Committee (MPC) are almost certain to hike rates when they next meet on Thursday of this week.
The US Federal Reserve (Fed) kept interest rates unchanged at 3.75%-4.00% last week. The vote was in line with expectations, although two members of the 12-strong Federal Open Market Committee (FOMC) dissented. Both wanted to hike rates by 0.25%. Debate over how aggressively the Fed needs to tighten monetary policy clearly continues. With the uncertainty of the US midterm elections hanging over the decision, the Fed struck a positive tone on the economy, upgrading its assessment of economic activity from “solid” to “strong” expansion, while reiterating an acknowledgment that inflation remains elevated. Markets continue to anticipate two to three rate hikes over the next 12 months. Fed Chair Kevin Warsh noted that the full effects of September’s rate rise are only beginning to feed through. And while the pace of price increases has only accelerated since the FOMC’s last vote, policymakers seem content to await additional data before hiking further.
Last week’s GDP and inflation data broadly supported the cautious approach. US economic growth expanded at an annualised rate of 3.4% during the third quarter, ahead of expectations of 3.2%, and up from 2.2% in the previous quarter. Growth was supported by robust consumer spending, strong business investment – particularly in technology and Artificial Intelligence (AI) related infrastructure – alongside continued government spending. However, there were some signs of slowing momentum beneath the surface. Personal spending increased by a more modest 0.5% in September, with households continuing to draw down savings to maintain spending levels. Meanwhile, inflation remains stubbornly high. The Fed’s preferred measure of underlying inflation, Core Personal Consumption Expenditure (PCE), increased to 3.1% year-on-year, up from 3.0% previously, while headline inflation climbed to 3.6%. The broad picture therefore remains one of more persistent price pressures amid resilient economic activity. Again, much hinges on the outcome of the Iran war. But there is concern in some quarters that the inflationary impact of the impasse in the Middle East may be broadening beyond energy prices. Strong growth and a relatively robust labour market give the Fed room to keep interest rates higher for longer. Another hike is widely anticipated in either December or January.
The European Central Bank (ECB) also left its key policy rate unchanged last week, having hiked the deposit rate by 0.25% in September. The decision was also in line with expectations, with the institution’s Governing Council stating that it was well positioned to wait. While inflationary risks persist, policymakers are increasingly concerned that elevated energy prices and tighter financial conditions could weigh on economic growth, potentially reducing the need for higher policy rates. Rising sovereign bond yields, particularly in France, have seen markets move to price fewer rate hikes than was previously the case. The ECB presently sees underlying inflation and wage growth as stable, but headline prints continue to sit well above the ECB’s 2% target. Policymakers will be wary of persistent energy inflation transmitting into second round effects, and therefore a more persistent problem. Headline euro area inflation hit 3.8% last month. And the ECB is likely to notably revise up its 2027 inflation forecasts in December. Markets currently price another rate rise then, with a further hike to follow in the early months of 2027. However, with the ECB President Christine Lagarde announcing her intention to step down earlier than expected, uncertainty over policy action into 2027 could linger.
Preliminary figures showed the Eurozone economy continued to expand in the third quarter of the year, albeit at a slower pace. Economic activity grew 0.4% quarter-on-quarter, decelerating from second quarter expansion of 0.6%. On an annual basis, growth was 1.3%, up from 1.2%. Germany, Spain and Netherlands reported stronger than expected activity, while the French economy contracted by -0.1%.
The Bank of Japan (BoJ) followed the lead of the Fed and the ECB, leaving its policy rate unchanged last week. A widely anticipated decision saw the BoJ maintain borrowing costs at 1.25% – their highest level since 1995. In a significant milestone, however, the BoJ stated that underlying inflation is now broadly consistent with its 2% target – the first time since the target was adopted in 2013 that it has made this assessment. The central bank also signalled that further rate hikes remain likely. After two decades of deflation, Japan again has inflation. But policymakers have undertaken a very gradual approach to monetary policy normalisation, despite price pressures and yen weakness. The BoJ forecasts inflation of 2.5% for 2026 and has increased its 2027 forecast to 2.6%. Government energy subsidies have limited the impact of the energy price shock for Japanese consumers thus far, but businesses have seen a sharp rise in costs. With firms increasingly passing higher costs through to prices, and persistent labour shortages sustaining moderately rising wages, underlying inflation seems likely to rise above target. However, despite the inflationary pressures materialising, slowing economic growth and weak consumer spending suggest financial conditions will remain broadly accommodative, with any further monetary tightening still tentative.
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