Ear to the Ground

03 November 2023

Stop, wait a minute…Not often you get to quote a lyric from a Mark Ronson song in market commentary, but it seemed quite apt this week.  The Bank of England kept interest rates on hold again this week, at 5.25%, for the second time in as many meetings.  There was a change in the balance of voting however, with three members voting for a rate rise this time round, compared to four last time.  It does not appear, however that we should expect a rate cut any time soon. 

The Monetary Policy Committee (MPC) were keen to point out that monetary policy is likely to remain restrictive until they are convinced that inflation will return to the 2% target level.  In terms of expectations, they forecast that consumer prices will fall sharply, reaching 4.75% in the fourth quarter of 2023, 4.5% in the first quarter of 2024 and then 3.75% by the second quarter.  Markets took the news well, however, with mid-cap stocks up over 3% on the day as a collective, whilst the 10 year gilt yield fell below 4.5%.

It wasn’t just the Bank of England who remained on hold, with the US Federal Reserve taking the same course of action too.  This was also the second consecutive meeting where rates were held, at 5.25%-5.50%.  Whilst they are also keen to see inflation return to target, they did not feel the need to take monetary policy to a more restrictive position.  Instead, they prefer to see the impact of the hikes which have already been made. 

During the press conference that followed Chair Powell was even as bold to suggest that the September dot-plot, which shows the views of the members of the rate setting committee, may now be wrong.  It had shown that there was a reasonable chance that we would see one more rate hike.  That possibility appears to be fading.  Financial markets, as in the UK, took the news favourably, most notably in the US Treasury market.  Here we saw the yield on the ten year note fall to 4.66% after peaking above 5% just last week.

The stance taken by the Federal Reserve was perhaps vindicated following the release of weaker than expected non-farm payroll data for October.  This was expected to show that 180,000 jobs had been added but the actually was only 150,000.  We will perhaps need to wait and see if this is a trend, however, with strikes weighing on numbers.  Outside of manufacturing jobs continued to be added, including in sectors such as healthcare, government and leisure.

Preliminary Euro Area inflation data for October perhaps suggests that the European Central Bank can afford to remain on hold when they next meet.  The rate declined to 2.9% year on year, down from the previous reading of 4.3% and below the consensus forecast of 3.1%.  There remains variation across member states, as always.  The Dutch rate came out at -0.4% year on year, with French inflation at 4%, although this had fallen sharply from the previous month reading of 4.9%.

Last word this week however goes to Japan.  Here we saw the Bank of Japan make further amendments to yield curve control policy, stating that they were more comfortable for the yield on ten year Japanese government bonds (JGB) to move to the 1% level.  They warned the market however that they want any move to be in a controlled fashion and warned they were happy to step into the JGB market if required. 

The government, meanwhile, announced a stimulus package to the tune of $113bn.  This is centred on tax cuts and cash handouts as they look to support lower income households whose spending power has been hit by the higher levels of inflation.  The authorities appear determined, after all these years, not to risk losing inflation, which they have craved for many, many years.

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