Exemplary disinflation has become the dominant narrative, after a string of ‘positive’ CPI reports in the US. But all eyes should be on industrial metals, which are signalling that the path to sustaining 2% inflation will not be smooth.
The price action in industrial metals may favour the Fed dot plots over current market pricing. It seems very unlikely that the Fed will be able to cut in 2023. Despite high-profile job losses in the technology sector, initial claims in the US unexpectedly fell 15k to 190k in the week ending January 14th.
Brussels is responding to the IRA by loosening restrictions on subsidies in Europe and accelerating permits for new projects. The director general of the CBI has called for a new green strategy, to prevent Britain falling further behind the EU and the US. The pressure on governments, globally, to increase subsidies to fund renewable investments will not abate.
Tory strategists are already earmarking tax cuts in the Spring of 2024 as a key part of the next election campaign. Politically, in the UK at least, there appears to be very little motivation to get the budget deficit down to more sustainable levels. This will prove even more difficult if the UK indeed has any ambition in green energy. The Conservative Party’s willingness to court votes ahead of a responsible fiscal policy will unnerve the Gilt market and should worry the MPC.
