This week in the markets: The final interest rate decisions of 2025 will hog the headlines; as jobs data in the US and UK paint a picture of a modestly slowing economy; and investors assess a third year of rising stock markets.

After the US cut interest rates for the third time since September last week, attention will shift this week to the Bank of England. The big question is whether the UK’s central bank is now approaching the end of its 18-month-old rate-cutting cycle.

The conventional wisdom is that rates will fall by a quarter percentage point on Thursday to 3.75%, with swaps markets pricing in a 90% chance of a cut. It would be the sixth rate cut since the Bank started cutting in the summer of 2024. But the decision remains a close call, and it is possible that Bank governor Andrew Bailey will be forced to use his casting vote this week.

Britain is caught between a slowing economy and still persistent inflation. Last week we learned that the UK economy contracted by 0.1% both in the month of October and for the three months to October. GDP had contracted by a similar amount in September.

At the same time, however, inflation remains well ahead of the Bank’s 2% target, with the latest figure showing prices growing at 3.6%.

Interest rates are thought to be approaching the so-called ‘neutral rate’ at which they neither stimulate nor constrain the economy and that has caused a roughly even split on the monetary policy committee between members who think rates should fall further to boost growth and those who think caution should be the watchword until it is clear that inflation is under control.Last month’s Budget provided mixed messages for rate-setters. In the short run a boost to economic growth from higher government spending argues for holding rates. But, further out, tax rises should slow the economy and argue for more support.

Before the Bank announces its rate decision on Thursday, we will have seen two key data releases relating to this two-way pull for growth and inflation. Firstly, tomorrow brings jobs data. Official labour market and claimant count data will show whether a weakening jobs market can support the case for easier monetary policy.

Then a day later, we will get the latest inflation print for the UK. Inflation continues to be held up by above target wage growth, as low productivity and key skills shortages keep the price of labour higher than a slowing economy might imply. On the same day, we will also see inflation data for the Eurozone where a retreat to the 2% target looks to be going into reverse. A modest rise to 2.2% is on the cards.

It’s actually quite a busy week for economic data around the world as the decks are cleared before the two-week Christmas break. Here in the UK, we will also see retail sales data on Friday. Japan decides on interest rates, also on Friday. While over in the US, Washington will clear the backlog after the autumn government shut down, posting two months of labour market data in one go.

Back to the markets and investors have started the week more on the front foot after a nervous end to last week. US tech stocks led a retreat after a sharp decline in Broadcom’s shares in the wake of a disappointing earnings release that reignited fears about high valuations for companies linked to the AI boom. 

Both the S&P 500 and Nasdaq fell by more than 1% on Friday as investors continued to fret that the huge spending by tech companies will not deliver the meaningful returns that are now priced into valuations. Both Broadcom and Oracle saw their shares fall by more than 10% last week. Other tech favourites, Nvidia and Palantir, were also off sharply on Friday.

Stock markets have also started to look more closely at the bond market, following last week’s Federal reserve meeting. Attention has now shifted to who the next Fed chair will be after Jay Powell steps down next year and what impact that will have on monetary policy. Although the Fed, like the Bank of England, is nominally independent of government, the White House has not held back from criticising Fed policy this year and it can clearly influence policy through the choice of Fed chair. 

Investors fear that with the dragon of inflation still very much alive and kicking, an easier Fed could lead to higher long-dated bond yields as investors seek to protect themselves from persistently higher price rises in future.

A rise in the compensation that investors demand for holding fixed income bonds could see long bond yields rising back towards 5% from their current 4% level. At that level, bonds become relatively more attractive than shares and stock markets might find it hard to justify their current valuation levels.

After three years of rising prices, stock markets may struggle to hold onto their gains in 2026.That is despite a still positive outlook for corporate earnings. These have staged an impressive bounce back from the tariff announcements of eight months ago when investors feared that Donald Trump’s reshaping of global trade would hit company profits. In fact, earnings growth estimates have remained in the low double digits, allowing profits to pick up the baton from rising valuations in terms of being the main driver of stock market returns.

The question is whether that is sustainable and whether it is enough to justify valuations which are high by historic standards in the US.

Worries about a growth slowdown and persistent inflation have provided a tailwind for alternative investments like gold and silver in 2025. Silver, in particular, has doubled this year, pushing through $60 an ounce for the first time as scarce supply and investor demand have boosted the price. Unlike gold, silver has many industrial uses and is a key component in electronics and solar panels.