Energy Price Cap Decision
Today Ofgem will announce the extent to which price caps on energy bills will be lifted for the period between 1st April to 31st September. Given the continued rise in wholesale gas prices (which led to around 30 energy companies going bust since the start of 2021), it is expected that the cap will rise by roughly 50% – equating to the average household seeing energy bills rise £620 per year.
The price cap takes into consideration the wholesale prices of energy in addition to other factors such as network and operating costs (currently making up around 42% of the bill combined), environmental & social costs (accounting for 15%) and a supplier pre-tax profit margin (around 1%).
One of the many consequences of around 30 energy companies going bust is that energy suppliers left standing have had to take on the orphaned consumers at a loss – amounting to around £2bn. Subsequently, making up these Supplier of Last Resort costs is expected to add some £100 to the energy bill per household next year.
Hence, all eyes will be focused on the Chancellor’s press conference today, where he is expected to announce a new support scheme which would involve £6bn worth of state-backed loans being issued to energy firms that would then be given back as rebate to households (roughly £200 each). Nevertheless, this would still mean that there would still be a £420 rise in energy bills for each household, and thus critics argue that more should be done to protect households against yet another blow to the cost of living.
UK gas prices are trading at around 300% higher than a year ago, with a plethora of supply and demand side shocks feeding into this. These included, the cold winter of 2020 depleting natural gas stockpiles, maintenance outages in Russia and Norway, pressure on Asian economies to move towards Liquefied Natural Gas (LNG) and geo-political tensions around Ukraine leading, amongst other things, to Nord Stream 2 lying idle under the Baltic Sea. However, in the UK natural gas prices slipped below 200 pence per them this week owing to an increase in gas leaving Ukraine to Slovakia (an on from there), mild weather forecasts and Storm Malik resulting in wind power generation reaching record levels.
Threadneedle Street: Threading the Needle of Inflation
At 12noon the Markets will be focused on Threadneedle Street, eagerly awaiting the Bank of England’s monetary policy statement and interest rate decision. With CPI in the UK at 5.2% and Governor Bailey’s pen no doubt running low on ink (given that each time it rises above 3% he must write to the Chancellor), the market is predicting a 95% chance of a hike of 25 basis points to ease off liquidity in the economy.
Such a rise would bring the base rate up to 0.5%, with some economists predicting that there will be subsequent incremental hikes to 1% by the summer and up to 1.5% by the end of 2022. The BoE maintains that such incremental rises give business, consumers, and mortgage holders sufficient time to prepare, particularly given how long the economy has been accustomed to low/zero rates. If today does bring a rate hike, this would be the first first back-to-back rate rise since 2004, although with the high probability of the hike, it has largely been priced into sterling already. The statement will also provide greater colour on their QE programme, where many analysts are considering how they may take the initial steps in unwinding the £895bn stimulus.
Why the Long Face for Facebook?
In the US, Meta – the behemoth formerly known as Facebook – was hammered in afterhours trading after it was revealed that active user numbers had fallen for the first time in the company’s eighteen-year history, taking about $200bn off its market cap. While over the last few years active usership growth has stalled in Europe and the US, this has been offset with the rises in Asia and the rest of the globe. However, while the fall in active users was almost inconsequential in isolation (losing around 20 million of the near 2 billion user base), the market could not have been clearer on how much of a problem they view this as.
Facebook have acknowledged that they are suffering from competition and named Tik-Tok specifically as a problem for them. They also acknowledged that Apple’s move to make it easier for consumers to switch off website and app tracking has led to less targeted ads being delivered – which could cost them $10bn in advertising revenue this year.
Hence, Meta’s forecasted revenues for the next quarter came in between $27bn to $29bn – considerably lower than what many analysts had predicted. However, with the recently announced plans to develop the meta-verse (a virtual reality interface where members can work and socialise) investors will be keeping a close eye on future developments.
Aside from the BoE’s rate decision at Midday, the ECB also have their interest rate decision at 12:45 (GMT) where the market is predicting that rates remain at the current level of 0%. At 15:00 we have ISM Services PMI data out of the US where it is predicted to come in at 59.5 – a slight decrease from last month’s 62 pint.