The Cambridge Weekly – 15th May 2023

The Cambridge Weekly – 15th May 2023

Trust the MPC to rain on May’s parade

After a period where it felt like there was a shortage of news, things are hotting up. Both equity and bond markets are bearing up well generally but, in our estimation, underlying risks have increased since May started.

After the previous week’s rate rises in the US and Europe, last week it was the turn of the Bank of England (BoE) to increase the UK base rate to 4.5%. While members of the Monetary Policy Committee (MPC) will have seen weak  real growth data for first quarter of 2023 (+0.1% versus the previous quarter, with March slowing sharply by -0.3% versus February), BoE researchers raised their estimate for economic activity this year and no longer think there will be a recession. More importantly, they expect year-on-year inflation to take more time to slow, to remain above 8% as of June, and to finish 2023 at 5.1%. They say the risks are skewed towards inflation continuing to be high rather than below the BoE’s 2% target.

US debt ceiling brinkmanship is nothing new

US Treasury Secretary Janet Yellen has warned that the federal government could default on its debt obligations very soon. Perhaps the odd thing is that this story does not feel like big news. This is at least the third occasion since 2011 that the possibility of a default has arisen as a consequence of not lifting the Congressional statutory limit on federal debt (colloquially known as the ceiling). The debt ceiling is not a limit on spending commitments, but rather on the government’s ability to pay for them. Tax and spend measures are agreed separately in budget bills, the debt ceiling just limits how much money is available when the bill comes due. In theory, this should be a simple procedural task for legislators.

European energy prices: the great reset?

European energy is at its cheapest level in nearly two years. Last Friday, European gas – as measured by the Dutch gas hub (known as the Title Transfer Facility or TTF benchmark) – fell to just over €35 per megawatt hour (MWh). Prices rebounded a little over the previous weekend, but have since sunk back through last week, continuing this year’s sustained downturn. Wholesale gas prices – the main determinant of energy costs for European households and businesses – have not been this cheap since July 2021, when Russia began constricting supply in the lead-up to its invasion of Ukraine. This comes on the back of improvements in non-Russian supply lines, reduced consumption behaviours and, above all, improved storage.