Here are this mornings headlines:
We haven’t spoken about inflation for all of five minutes, so we should probably start there: UK CPI numbers for August were posted this morning and show inflation at 3.2%, up from 2% in July, which is the largest month on month jump since records began! The big move higher is being attributed to last year’s ‘eat out to help out’ scheme, which meant that restaurant meals were heavily discounted and therefore give us a very low base to start from, which means this year’s comparative cost of dining out is significantly higher without the scheme in place. Economists had priced this into their forecasts, but were still caught short of the actual reading, having thought that we wouldn’t have crossed the 3% threshold this time round. We’re likely to see a few more quarters ahead of higher inflation, particularly once the energy price cap rise of at least 12% comes into effect from October, meaning household bills are likely to go straight up to that level almost overnight – more on energy shortly.
There is some ‘good’ news on inflation which the Fed will be keen to cling on to: US data yesterday showed inflation easing off slightly last month. The slowdown was only 0.1%, but shows that, for now at least, the wind has been taken out of the price rise sails and added some credibility to the argument of most central bankers that inflation is transitory and the effects of stretched supply chains and pent-up consumer demand have started to wash out. However, this does cut both ways and as prices that were rapidly rising start to slow down a bit, such as used cars, there is a risk that those areas of the economy that are still being pinned down by the pandemic – such as airfares – come back with a vengeance if/when the US does get the ‘all clear’. If this were to be the case then the Fed’s argument that things are transitory would wear very thin very quickly and we’d see the bond market likely try and catch up with inflation (for the moment, traders do believe that things are transitory and are keeping bonds lower than inflation, having done so only twice before in the last 40 years, during the oil crises of the 70’s and 80’s) which means that real interest rates would spiral. So, for now the Fed has got what it wants, but are by no means is there thinking fully vindicated.
UK Energy Market
The UK energy market has once again seen record prices this week, with day ahead prices trading above £450 and possibly heading higher still as the wind stays relatively flat yet demand for energy increases as things are getting a little colder. Gas supplies continue to be strained across Europe, as stockpiles are relatively low because Russia has limited its exports (and yet Germany seem fine with becoming more energy dependent on the Kremlin once Nordstream 2 comes online?) and because UK producers are running about 70% of previous capacity because they’re catching up on maintenance that they couldn’t undertake during the pandemic. We’ve also got a Brexit effect, with us less able to take advantage of France’s significant nuclear and renewable generation capacity because we have left the International Energy Market. The upshot for businesses is that they’ll be paying more and will need to pass prices upwards through their supply chain, which will probably land with the consumer, whilst households will all be paying more once the energy price cap increase comes into effect, or when their fixed tariff expires – coming into winter this is going to mean tough decisions for many households on when they turn the heating on and would be particularly tough if there is another lockdown.
Freight Containers Production
Due to major shipping disruptions, Chinese manufacturers are now at full tilt, delivering record volumes of freight containers after shippers ordered titanic (not sorry for the pun) numbers of containers. Despite the vast increase in numbers of orders, shipping executives have made it clear that the backlog and delays are likely to persist for some time to come. This is largely due to the surge in online shopping, predominantly because a limited amount of containers are currently available. Because of the high demand to deliver stock around the world, the main issue is that a lot of containers are currently in the wrong places, and moving them is proving problematic, as ships and dockyards are already at capacity. Hapag-Lloyd, who are one of the world’s largest shipment groups have estimated that around 20% more containers are currently bound in shipments than before the crisis. There is set to be an increase of two-thirds on 2020’s container production, as three Chinese groups, who make up about 80% of the world’s containers, are set to deliver 5.2m 20 ft units. It will come as no surprise then, that Shenzhen-based CIMC, the largest producer of containers, said last month that they had received record sales of containers, selling 1.15m from the start of the year to June.
As with any supply and demand issue, the price of containers has soared, more than doubling from $3,645 per 20ft box at the end of 2019. This has somewhat opened Pandora’s box, with major concerns been aired regarding the quality of the containers being produced, and also the ever growing dominance of the Chinese suppliers within the industry, so much so, that the US Federal Maritime Commission has informally launched an investigation. I would be surprised if the investigation yields anything that would slow China’s progress; the reality is that China have a competitive advantage. Because the majority of goods are exported from China, making the containers there is the most efficient way of keeping costs down. The alternative of transporting them to where they need to be would increase the production cost by around ¼. Surprisingly, Vietnam is being touted by analysts as the most likely to challenge China’s dominance of the market, along with India, Turkey, and Russia.
US Debt Ceiling
The US debt ceiling conversations are starting again and the best estimates are that sometime next month the US will run out of ways to raise money to keep government going unless the debt ceiling is raised. Normally this is an 11th hour decision that eventually gets done – with the exception of Trump, who effectively shut down the government for more than a month in 2018/19 when he didn’t raise the debt ceiling in retaliation for not getting the money for his border wall. Now the shoe is on the other foot and the Democrats are going to have to get Republican agreement to raise the ceiling, though at exactly the same time as the Democrats are going solo on their $3.5tn budget plans, leaving Republicans out in the cold. We’re hoping that common sense prevails and either the Democrats push through a ceiling raise as part of their budget plans, or that enough Republicans work out the possible implications of a US government that can’t pay the bills, but we wouldn’t be surprised to the downside either.
Briefly: Elon Musk is joining the space tourism race, catching up and eclipsing Sir Richard Branson and Jeff Bezos by sending four ‘amateur astronauts’ on a three day trip to space at an altitude of 575km, which smashes the distance from earth set by Bezos (100km) and Branson (80km), though Mr Musk won’t be going himself.
Have a great day.