We are experience what I believe will be something of a nexus event and it is already in play. There are two issues in the initial phase which is the rise in the cost of energy which in the UK had its first instalment in domestic energy terms on Friday and next concerns over whether there will be actual power cuts. As to the latter implied power cuts are now baked in. The first type where industry finds it too expensive to produce has already happened in some places. For example the CO2 shortage which of course was an irony in itself was driven by that. As power has got more expensive in the meantime that will be happening on a a wider scale.Next comes industrial companies being asked not to operate at certain times. Like for example on cold still days when we have little or no output from the UK wind farms. It would not take much more for that to spread to the domestic consumer whether by price via the real use of Smart Meters or by actual cuts.
This morning’s consequence is shown below.
GAS MARKET: In early trading, European natural gas contracts opens sharply higher as temperatures start to drop over Europe. Benchmark UK NBP and Dutch TTF are up another 12-15%, after gaining about 20% on Tuesday. Both are setting all time highs ( @JavierBlas)
This is posing all sorts of issues and flowing into other markets as well. From The Spectator Index
Brent crude oil price 1st of May: $67 1st of June: $70 1st of July: $751st of August: $72 1st of September: $71
Now: $82.5
So up again on what we noted yesterday which just reinforces the problems for the energy importer Japan. But at a time like this even daily updates do not last.
European natural gas benchmark prices climb more than 20% now to fresh record high (both UK NBP and Dutch TTF). A complete train wreck. ( @JavierBlas )
Now let me switch to the consequences of this so far.
Economic Output
The path for this has been shifted lower. We have already noted the impact of higher prices and energy intensive industries such as steel and cement must be reeling. The Energy Information Agency has a list.
Food Food, beverage, and tobacco product manufacturing
Pulp and paper Paper manufacturing, printing and related support activities
Basic chemicals Inorganic chemicals, organic chemicals (e.g., ethylene propylene), resins, and agricultural chemicals;includes chemical feedstocks
Refining Petroleum refineries and coal products manufacturing, including coal and natural gas used as feedstocks
Iron and steel Iron and steel manufacturing, including coke ovens
Nonferrous metals Primarily aluminum and other nonferrous metals, such as copper, zinc, and tin
Nonmetallic minerals Primarily cement and other nonmetallic minerals, such as glass, lime, gypsum, and clay products.
They may also be asked to stop producing although for certain areas such as food I am sure you can see the problem. So it does not look as if there will be much growth to go around and maybe another decline.
Inflation
The path for this now looks set to soar. The October inflation figures will reflect the domestic energy price rise from the start of the month. But looking ahead it is plain that there will have to be another rise next April. It could easily be double the size of the one just seen. There will be other price rises in the producer price numbers of which the most obvious will simply be the higher price of crude oil in the input numbers. Later the output numbers especially for the energy intensive industries we noted above will rise as they try to cover their costs.
In terms of domestic inflation I have pointed out before that we are in for a period where the Retail Prices Index (RPI) will go above 5% and now I say the same about 6%. Frankly if these level of gas prices remain it could be 7%. This is an utter failure by the Bank of England which will be burning the midnight oil to find some excuses for this. A little care is needed because they did not explicitly push energy prices higher nor would an interest-rate rise reduce them. But they have done everything they can to raise inflation into an inflationary boost as in they have pursued exactly the opposite of their claimed mandate.
They thought they were being clever pushing demand back to pretty much normal levels but made no note at all of the issues for a supply side still suffering from a Covid hangover and assumed it would bounce back like a rubber ball. These have been international as this from the German industrial orders numbers earlier shows.
The manufacturers complain about delivery bottlenecks for preliminary products.
Thus we got inflation and a particular bottleneck has been energy supply. Yes the same energy supply that the central bankers have just interfered in as they move onto climate policy. It is the only occasion where they have their timing right except they had the chart upside down.
Interest-Rates
These are on the move but in the obvious version there is a catch. This was exemplified early this morning from the Reserve Bank of New Zealand.
The Monetary Policy Committee agreed to increase the Official Cash Rate (OCR) to 0.50 per cent.
On a lighter note I was expecting this after the All Blacks lost at the weekend. But more seriously it is both too small and too late in their own words.
Headline CPI inflation is expected to increase above 4 percent in the near term before returning towards the 2 percent midpoint over the medium term.
Best of luck with the latter point by the way.
Bond yields are also rising with the UK ten-year yield now above 1.1% which poses yet another question because central banks have been making it cheap for governments to borrow. Overall that is still true but relatively the price is edging higher. The UK fifty-year yield is now 1.32% and I guess those in authority are regretting ignoring my advice to issue some 100 year bonds whilst it was cheap.
Comment
Let me offer some calm. The extreme moves at the moment look like a “financialisation” of the natural gas market where traders look to have been net short and are being forced to pay and really pay to get them back.This is also affecting the power companies who feel they have to buy. So that should calm down as will the extreme prices. But underlying this are some serious problems and the most obvious is the way that the dash for renewables was so ill thought out. I have been to many meetings where the main discussion point has been Margaret Thatcher but have been left bemused by the unwillingness to accept my point that her worst decision was to close the coal mines. That has been added to by the closure of coal power stations which we could do with now. The is a type of bipolar thinking as we apparently can do all sorts of technical things with renewables but cannot with coal. Of course much of the former has crumbled in this episode.
Next comes the institutional failure and let me concentrate on the central banks who got their main job which was supposed to be inflation control completely wrong. Also they thought it was a free lunch providing cheap bond yields for governments. But now savers will see an extreme form of financial repression with inflation at 6% and interest-rates at 0.1%. It will be different this time crumbles again….
I fear for the poor through this who at best at going to struggle to heat their homes through this winter even with my optimistic viewpoint above. Meanwhile the Bank of England has filled its pension fund boots with bonds based on the RPI inflation index it has done nothing to defend for everyone else. In fact quite the reverse under the hapless absent-minded professor Ben Broadbent.