Bank of England
The Bank of England are no longer subtly hinting at possible rate hikes to combat the no longer transitory inflation. Inflation could rise as high as 5%, which has triggered economists, forecasters and Facebook experts to project that the Bank of England will begin to hike interest rates in two weeks time. Huw Pill, Chief Economist at the BoE, projects that we will most likely see monetary policy tightening on November 4th, as he told the Financial Times: “I think November is live.” The Bank of England is walking a very fine line, as the economy heads towards stagflation, with rising interest rates and a stunted rebound in the economy, the danger is that any hikes to combat inflation, may well impede the economic recovery out of Covid. There are a few variables to consider, specifically the rapidly rising infection rate in the UK, which if left unchecked, could be economically detrimental through the cascading effects of working from home or further lockdowns. This all comes as the UK is hurtling towards another winter of discontent, with consumer confidence tanking for a third consecutive month in October, slipping from -13 to -17, the lowest level since February, and without sounding too bleak, the worst is on the horizon.

Manufacturing Sector
Following the drop in Consumer Confidence, there are also disconcerting signs regarding the manufacturing sector, which is facing an increasingly challenging landscape. Almost two thirds of manufacturers have cited the availability of materials and components as a likely factor to limit output in the next quarter, the highest proportion since January 1975, according to the FT.  This expands beyond being able to get their hands on raw materials… Basic economics points towards supply and demand, and with the demand so high and the supply (and ability to transport) relatively low, the next hurdle to overcome are rising material costs, which are making production in some key areas almost prohibitively expensive. I am not saying this must be similar to the issues the country faced in the 70’s, however a survey from manufacturers has highlighted that the labour shortages, or specifically the lack of skilled labour (which is already effecting output), has resulted in two out of five companies being concerned about skilled labour… the highest share since 1974, with nearly a third concerned about other labour too.

 

Russian Concerned About Gas Prices?
Remarkably, Russia are becoming increasingly concerned that surging gas prices (which they are increasing themselves) risk damaging demand in their biggest export market. “Such a situation, at the end of the day, is leading to lower consumption, and this will affect our producers, including Gazprom PJSC,” President Vladimir Putin said at a government meeting. Russia’s main export market is Europe, and with capped pipeline supplies and intense competition with Asia, there have been major supply shortages, resulting in gas prices breaking record after record in recent weeks. This is a major issue for practically anyone who’s life can be effected in anyway by the use of gas, ranging from household bills to the price of food and everything in between. Is there an obvious solution? Of course there is. Russia have already intimated that they will not go out of their way to increase glows to Europe to alleviate the gas issues, without getting something in return, which is regulatory approval for the Nord Stream 2 pipeline. “We cannot ride to the rescue just to compensate for mistakes that we didn’t commit,” Konstantin Kosachyov, a top pro-Kremlin legislator in the upper house of parliament. As if to really drive the point home, the operator of the pipeline has said “its first line is full of so-called technical gas and ready to begin operation, though it can’t ship it until regulatory approval is granted.” The reality is, the relationship between Europe and Russian is still extremely complicated, with Russia having faced years of sanctions and other tensions, there is no appetite from either side to do any favours. Although the power in this stand-off lies truly with the supplier, not the one facing unimaginable amounts of difficulties through a lack of supply, heading into winter, while still trying to ignite economic recoveries. As it stands, German regulators are currently reviewing the application for certification, however it is looking increasingly likely that should a decision be made, it will be in January, after which, the European Commission would also need to get the go-ahead, so pencil the 35th January for as a reasonable response time.

China’s Evergrande Group
The can that continues to be kicked down the road, has taken another punt. China’s Evergrande Group has pulled another rabbit out of the hat to pull themselves back from the brink of default, by beating this weekend’s deadline to pay another bond coupon. The first payment was missed 30 days ago, which triggered a 30 day grace period for bondholders to receive their funds, which are expected to land on Saturday, the 30th day… taking Just In Time to the extreme. Evergrande has been meticulously covered in previous iterations of this report, so the long and short version, is that they are on the precipice of defaulting with rumours of this fact swirling around for months, stoking credit-market contagion, specifically around other-cash strapped developers, which has percolated through China’s real estate market, as far as their GDP, which is suffering as China make new rules and laws to prevent something like this happening again, in turn, prohibiting growth in the sector. ​​
I hope you enjoy your weekend.
This Morning Report was brought to you by Alex Ayoub

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