Gas prices rose by almost a quarter in a single day yesterday, after Germany suspended the certification process for the Nordstream 2 pipeline. The reason for the suspension wasn’t political (on the face of it at least) but instead because Nordstream 2 set up a subsidiary to run the pipeline, which now needs to fulfil the criteria of an ‘independent transmission operator’ under German law before it can be certified. The reaction in the markets is quite understandable, with gas reserves running low in Europe and winter weather inbound, there is now concern that Europe could find itself having to implement rolling blackouts if the situation doesn’t improve, according to the CEO of commodity trading giant Trafigura. If things do get really bad then non-essential industry would be rationed before energy generation to power the grid would be disrupted, but if that wasn’t enough to maintain supply then the restrictions would have to widen.
Gas prices were a big contributor to inflation numbers that were just printed in the UK, showing price growth is now more than double the Bank of England’s two percent target. Consumer prices rose to 4.2% in October, far higher than the year-to-date figures of last month and higher than analysts had thought and now the highest print since 2011. Energy costs for both homes and transport factored heavily in the increase, as did the cost of eating out, which is being hit by both increased cost of goods and staff salaries, which are ultimately being reflected when you get the bill. Inflation numbers are expected to keep on going, with economists previously expecting this to go north of 5%, but with the speed of increases, perhaps they’ll now start to reconsider what peak inflation could be. We’ve got to wait until about March or April until the ‘base effects’ of the disinflation that we saw over 2020 start to fall out of the numbers and when we get here, we should see the growth numbers ease up swiftly, but it’s what we have to live with between now and then and also how quickly supply chains can be fixed that will matter the most.
In the US, consumer sentiment is akin to the levels you’d see during a recession, according to the Richmond Federal Reserve president. The mood amongst the consumer is being driven by surging prices and although the view is that it is likely to go away, there is concern about what happens if it doesn’t and the Fed are then forced to play catchup. Joe Biden has said he’ll announce in the next four days who the next chairman of the Fed will be and at the moment it looks like a two-horse race between the incumbent, Jerome Powell, and FOMC member Lael Brainard. The two have worked closely together for years and their monetary policy stance is in step, but crucially Powell is a Republican and was nominated by Trump whereas Brainard is a Democrat – we’ll see if continuity and ‘reaching across the aisle’ wins the day, or whether he wants to nominate someone from his own camp.
China & US
Biden has asked China to join the US and release some strategic oil reserves to help stabilise increasing global prices. Analysis from the US Energy Information Administration has shown that if the US were to release anywhere from 15-48 million barrels of oil from their stockpiles, then global prices would only ball by $2per barrel, which would only translate into between five and ten cents of savings at the petrol pumps for the US consumer. The US has a lot more than 48 million barrels (at least ten times that) but sanctioning a release of much more than that would put them at a strategic disadvantage and also be a political hot potato, so asking China to go in with them not only de-risks them, but also gets them collaborating a little which is no bad thing.
Today’s data highlight was probably UK inflation, which has caused stocks to head lower and the Pound to head higher. Later in the day we get European inflation and though the Euro could sorely use a big print, it’s unlikely that even the highest of inflation numbers would move the ECB to consider rate rises, so we can’t quite see how the euro gets out of a rut – also adding to the pressure are the covid cases and returning restrictions, both of which are rising across the continent. The US session is dominated by Federal Reserve speakers, but they’re not going to be able to answer the question as to who is going to be their next boss, so we’re not sure they move markets.
Have a great day