The Cambridge Weekly –13th November 2023

The Cambridge Weekly –13th November 2023

Back pedalling central bankers

The turnaround rally in stock and bond markets – started by the previous week’s dovish central bank comments – petered out towards the end of last week, with central bankers seemingly at pains to reverse their messaging, or at least reaffirm their continued commitment to keeping interest rates high, however long it takes to get inflation back to their 2% target. Perhaps this was not entirely surprising, given the eight- day streak of US stock market gains and easing bond yields undid much of the financial condition tightening that US Federal Reserve (Fed) Chair Jerome Powell referred to recently as doing the central bankers’ job (see chart below – the higher the reading the tighter the financial conditions). But then – not really – or at least the fundamental shift in market sentiment has occurred and is unlikely to flip again so soon.

Bank of England giving and receiving mixed messages

When the Bank of England (BoE) kept interest rates on hold recently, Governor Andrew Bailey told reporters that it was too early for monetary policymakers to talk about cutting from historically high levels – thanks to persistent inflation pressures and tightness in the UK labour market. Most commentators interpreted his words as adherence to the ‘higher for longer’ mantra gripping central banks on either side of the Atlantic. But last Tuesday, BoE chief economist and fellow Monetary Policy Committee (MPC) member Huw Pill said during a conference’s panel discussion, that market expectations of an interest rate cut next year are not “unreasonable”. Only too early by a few days, perhaps?

Europe’s natural gas has a bumpy road down

A year ago, Europeans were terrified they would run out of natural gas during a cold and bleak winter. Now, the continent has more gas than it can handle. European gas supplies, which had been building from an already high level (by seasonal standards) since the spring, officially reached 100% of storage recently. The 100% level refers to the secured capacity of working gas volume as reported by individual facilities which, in many cases, can be lower than the total physical capacity. That means reported storage can sometimes exceed 100%, as was the case in Portugal (107.3%), Romania (103%), Spain (100.4%) and Germany (100.03%) as of the start of last week.