Good Morning,
UK & European Gas Prices
It was a busy day again for energy traders, with gas prices in the UK and Europe soaring: UK spot prices hit £3 per them, which is three times where they were back in August, whilst European prices are up from €18 per megawatt hour in April to almost €118 for delivery next month! Understandably, the concerns have spilled over from commodity markets and the bond markets with yields in UK bonds rising to levels last seen in May 2019, as investors start to bet on the Bank of England being forced to raise rates as inflation takes hold. Europe have pointed fingers at Russia for not increasing supply, whilst Ukraine have accessed them of “weaponizing” the situation in a bid to get Nordstream 2 up and running. The Kremlin must be loving this though, as they’re making a fortune from the gas they are supplying – to the extent that gas prices where they are would be the equivalent of a barrel of oil trading at $200, with the vast majority of that being pure profit for the supplier.
UK
Boris takes to the stand today and is going to frame the current problems the UK is facing as just part of the process of his brave moves to take the UK into a new era of being a high wage, high skilled economy. In a bit of a dig at his predecessors, he’s going to say it’s taking him having the guts to make such a fundamental change and that what we’re seeing now is short term pain for long term gain. Adam Fleming unpacked the word ‘guts’ on BBC news earlier, saying it’s the sort of word you use when you’re taking a risk – which if this is a plan and not just a story to fit the current narrative, then it definitely is not without its risks. Though Boris isn’t likely to announce this today, there are rumours that he’ll announce an increase in the National Living Wage to £9.42 an hour, which would be an inflation beating rise, that would not only serve to reinforce his position that wages are rising across the country, but it would also take the wind out of Labour’s sails, as they’ve been calling for it to rise to £10 and berating the Tories for not listening to them. Wage growth across the economy is a more nuanced situation and though there are spikes in wage growth in areas where there are skills gaps, the overall growth story across jobs vacancies is just 1.3 percent and general industry pay rises amounting to just 2-3%, in the private sector and even less in some parts of the public sector – which when netted against inflation means that everyone is worse off. Rishi Sunak believes that most inflation will be transitory – which is an argument that we’re finding harder and harder to hang on to – and that they will “pass their way through the system over the course of the next three, six, nine, 12 months depending on the particular part that you’re looking at”.
US
Over in the US: Democrats and Republicans have finally found some common ground: Hating Facebook. The Senate has been hearing testimony from a whistle blower and both sides of the aisle have been revelling in just what a damming picture is being painted, with Facebook apparently consistently putting profit above the public good.
There is now momentum building for some changes to regulation as a result, but the whistle-blower themselves made clear that tweaking outdated rules would not be enough and made some pretty interesting suggestions, one being that Facebook should hand over their data and allow it to be researched independently so that fuller and unbiased understanding of the problems could be reached and appropriate regulations put in place as a result – rather than waiting until something comes up, trying to work out how widespread it is and then tweaking a law in the hope that it solves what they believe to be the problem based on what Facebook has told them – an interesting analogy to the current setup being like “the department of transportation regulating cars by only watching them drive down one highway”. Mark Zuckerberg has been called upon to testify, but his team have said this is unlikely given that he’s been there seven times in the last four years.
New Zealand
New Zealand have raised interest rates for the first time since 2014. Their quarter point move higher makes them one of the first developed economies to raise rates. Inflation in the country is above 3%, but they are now getting some headwinds from covid that could slow down the economy in the coming months, so it’s not the easiest decision that they’ve made. The central bank have stated that they’d like to continue to reduce their monetary support, but have said that it is entirely contingent on the economic outlook and therefore not a done deal.
China & US
China and the US are set to hold talks in Switzerland this week, which could pave the way to a virtual summit between Joe Biden and Xi Jinping. The US have been keen for the leaders to get some facetime, but China have so far resisted – albeit Mr Xi hasn’t left China since the pandemic. They could definitely do with a sit down, as the issues they’re not in agreement on are a plenty, but the largest are bilateral trade and tensions over Taiwan and the South China Sea – which admittedly might not be solved over a cup of tea. President Xi is also set not to attend the G20 summit that is set to being in Florence at the end of the month.
Looking at Today
UK construction numbers and European retail sales data will be the highlights this morning, whilst in the US session we get some employment numbers and also oil inventories, which the market will be paying close attention to – despite the demand as the world comes back on-line and OPEC refuse to pump more, there has been some quite significant swings in stockpiles, which is catching the market out and causing some volatility. Gas prices will also be one to watch.
Have a great day
