12 October 2021: Can the UK afford to subsidize gas

Can the UK afford to subsidize gas

12th October: Highlights

  • Momentum fading as crises mount
  • Consumer slowdown could push the economy into recession
  • Rising gas price compounds inflation fear

Sunak needs a money tree

Having subsidized the wages of millions of workers furloughed during the Pandemic, The Chancellor of the Exchequer is neither willing nor able to find the funding requested by the Business Secretary to enter into another commitment.

A row is developing between Chancellor Sunak and Business Secretary Kwasi Kwarteng following the latter’s appearance on TV over the weekend, when the spoke of providing relief for industries that are being crippled by the high price of wholesale gas which has quadrupled this year.

Kwarteng has now made an official application to the Treasury for funding to ease the pressure. A one-off agreement to fund one of the UK’s largest suppliers of CO2 ended yesterday.

CF Fertilizers supplies 60% of the country’s commercial CO2 supply. It halted production at its plants last month to give an ultimatum to the Government to avoid disruption to food supplies

The agreement was put in place to ensure that food supplies were not disrupted, but the story has moved on very quickly since that deal was struck.

The steel and glass industries are also being very badly hit by the rising price of gas.

As Qatar, the world’s largest supplier of Liquified Natural Gas, said it was powerless to reduce the price of gas given heightened demand from China, the price of oil began to climb, reaching a multi-year-high yesterday.

This fast-moving issue is sure to influence the Bank of England in its deliberations over the rise in inflation.

With energy bills set to soar and food producers saying yesterday that the country will have to get used to higher prices going forward. This is likely to add to the crisis in the logistics industry and a growing concern over a lack of workers in several other mostly low paid roles.

With Brussels looking on and finding it impossible to gloat, Boris Johnson’s affirmation that the shortage of workers is due to the conversion of the workforce into a better paid and higher skilled one is looking more moribund by the day.

The pound is beginning to be regarded similarly to the euro, in that traders believe that it is only a matter of time before it begins a more rapid decline.

Yesterday, it reached a low of 1.3581, closing at 1.3597.

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Consumer at the heart of issues

Analysts studying the long-term prospects for the U.S. economy have found that the conditions that have been in place prior to every recession since the war are beginning to form.

The most telling of these is the fall in consumer sentiment. Every recession since the 1980s has been preceded by a significant fall in this index and although it is not yet significant, consumers are becoming less inclined to spend.

As the country continues to pay people not to go to work, the way the economy is driven appears to be going through a meaningful change.

Friday’s employment report which showed a significant miss on analyst’s prediction for net new jobs was affected by the fact that 400k workers left the market.

With Friday’s data having no major effect on the Fed’s intentions towards a cut in support being given to the market, an interest rate rise as opposed to a taper of support looks as far away as ever.

Since Friday, there has been a lack of comment from FOMC members, so it is being assumed that the headlong rush into removing support is still slated for next month.

Inflation remains the major player in Fed considerations. Qatar said yesterday that there was no way that the U.S. could avoid the rising gas prices, despite being almost self-sufficient in its own right.

The fall in the unemployment rate to 4.8% has provided a small amount of comfort for those looking for solace in what was a car-crash of a report.

Despite this, it seems that nothing will deter the FOMC from acting as Jerome Powell and his colleagues have opened their eyes to the reality of rising inflation. There has been no mention of transitory inflation recently, as that much used phrase seems to have disappeared from the central bank lexicon.

The dollar is being buoyed by the prospect of Fed action.

Yesterday the index was in a narrow range, closing at 94.34.

Can continually higher prices be considered transitory

ECB President Christine Lagarde may not have invented the term transitory inflation, but she has certainly made it her own.

However, what was a useful way of avoiding the glare of her more hawkish colleagues may now become a millstone around her neck, as inflation looks like being anything but transitory going forward.

Despite Russia commenting that it doesn’t use its energy stock as a weapon, a comment that was agreed with by outgoing Chancellor Angela Merkel, Vladimir Putin’s shadow over mainland Europe appears to be growing.

The price of gas remains volatile, with wholesale prices rising by 7.5% yesterday, although they are still below the record seen last week.

This unexpected factor looks likely to force the Central Bank to reconsider its position on inflation, although the new policy is unlikely to change.

With Germany seeing headline inflation of over 4%. When it averaged0.37% in 2020, alarm bells will be beginning to ring all over Frankfurt.

In addition to the well-known issues facing the Eurozone economy, there are several new factors that will have to be factored in if the threat of stagflation is not to become a significant factor.

While it is not immediate, the slowdown in the Chinese economy will eventually see a slowdown in European manufacturing, particularly, the automotive sector. The growing energy crisis may also spill over into the price of oil. This will add to both inflation and a weaker economy.

Coronavirus is still a factor, and the fact that the delta variant is now the predominant strain means that herd immunity is not the factor it was expected to be by now.

The Euro is unlikely to find any solace in the short to medium term. The new factors affecting the economy will see it fall further if it breaks support around 1.1520.

Yesterday, it fell to a low of 1.1549, closing just two pips higher at 1.1551.

Have a great day!
About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”