Markets fret as consumers and investors lose faith in central banks keeping a lid on inflation
The price of natural gas is soaring – and both equity and bond markets are again fretting about surging inflation.
The cost of wholesale gas for next-day delivery in the UK today hit an all-time high of £3.55 per therm (one therm is equal to 100 cubic feet of natural gas), a rise of 27%, meaning the price has doubled in a week.
The immediate upshot is that more “challenger” household energy suppliers, who tend to buy their gas on the spot market rather than in advance, are likely to topple over.
Please use Chrome browser for a more accessible video player
Energy boss: It’s ‘crunch time’ for many small providers
This is not just an issue in the UK.
Natural gas prices are rising across Europe due to a combination of liquefied natural gas cargoes being diverted to Asia to meet growing demand there, lower supplies from Russia and lower output from renewable energy sources such as wind and solar.
The United States is also seeing a surge in natural gas prices.
Stock markets have suffered several bouts of unease this year amid signs that inflation is taking off.
There was a notable sell-off early in May reflecting a rise in the price of commodities such as copper and the cost of shipping, exacerbated in March by the stranding in the Suez Canal of Ever Given, a container ship en route from China.
On that occasion, markets took at face value the insistence of central bankers such as Jay Powell at the US Federal Reserve, Christine Lagarde at the European Central Bank and Andrew Bailey at the Bank of England that the inflation starting to appear was simply “transitory”, a reflection of surging demand as economies re-opened after the pandemic.
The standing of the Ever Given in the Suez Canal exacerbated factors behind a sell-off earlier this year
Investors around the world are now taking the threat more seriously.
For example, in Japan, the world’s fourth largest energy importer, the Nikkei 225 has fallen in each of the last eight sessions, taking it into correction territory.
Similarly, the Dax in Germany is down to a level last seen in May, while the Nasdaq – which is full of tech stocks which tend to move in close correlation to expected movements in interest rates – fell this week to a level last seen in June.
The anxiety about inflation is playing out most markedly in the sovereign debt markets.
The yield on 10-year UK government gilts (the yield on a bond rises as the price falls) has surged from 0.621% at the start of September to 1.15% – a level not seen since May 2019 – today.
In the same period, the yield on 10-year US Treasuries has risen from 1.307% to 1.552%, while yields on Treasuries of other durations have also risen.
Several things have changed since May.
The first and most obvious is that the price of crude oil has continued to grind higher.
The Nasdaq has fallen to levels last seen in June
In May, during the last inflation-inspired stock market squalls, a barrel of Brent Crude traded at between $64-$70 a barrel.
This month, so far, it has traded in a range between $77-83 a barrel.
The main US oil contract, West Texas Intermediate, has seen an even sharper move higher and is now trading at a level last seen in November 2014.
That is starting to feed into inflation expectations – something central bankers everywhere watch warily because it usually tends to feed into higher wage demands.
For example, two weeks ago, the latest survey of inflation expectations carried out by the investment bank Citi and the pollsters YouGov found that the British public is expecting inflation to hit 4.1% over the next year.
It is a similar picture elsewhere.
The latest survey from the University of Michigan, which is closely watched by US policymakers, this week pointed to rising inflation expectations among American consumers.
And a market measurement of inflation expectations among consumers in the eurozone – a part of the world that during the last decade has had to worry more about deflation, or falling prices, than inflation – this week hit its highest level for six years.
The price of crude oil has continued to grind higher
In other words, consumers and investors in the US, the UK and the eurozone appear to be losing faith in the ability of their central banks to keep a lid on the cost of living.
That belief is entirely rational if, for example, you are a British motorist who has spent hours during the last couple of weeks trying to find petrol or, for example, you are an American consumer looking at big increases in the price of your weekly grocery shop.
What is particularly interesting is that a number of so-called “trimmed mean” inflation measures, which strip out the more extreme price changes of items in the inflationary “basket”, suggest the headline rate of inflation in the US is being artificially depressed by big drops in items such as air fares and hotel rooms.
They imply that underlying inflation – that element of inflation that cannot simply be explained away by pandemic-influenced levels of supply and demand – is actually much higher.
The third factor is that some investors are now starting to think seriously about “stagflation” – the ghastly combination of stagnant growth and inflation last seen in the 1970s.
Google searches for the term “stagflation” have in the last week hit their highest level since July 2008, when the global financial crisis was getting under way.
Now, there are several good reasons to argue that we are not in for a re-run of the 1970s, not least the fact that the world is less dependent on oil than it was then and the fact that the trades unions – in Britain at least – are not as powerful as they were then.
But such searches do point to a change of sentiment among not only investors but the wider public.
British motorists have spent hours stuck in petrol queues
There is every reason to think that inflation may well rise in coming weeks and months.
A clutch of UK companies, including the car and aerospace parts supplier Melrose, the bakery chain Greggs, the furniture and floorcoverings retailer ScS and the online fashion retailer Boohoo have all in the last week highlighted labour shortages, supply chain issues and rising input costs.
And that is likely to feed into higher bills for consumers.
Petrol prices are already at their highest level for eight years.
The increase in the energy price cap this week will result in higher household energy bills for 15 million UK households.
And recent rises in the price of a number of agricultural commodities in recent weeks mean that food price increases are looming.
Further eating away at the ability of consumers to spend will be next year’s increases in national insurance.
In London, meanwhile, nearly 350,000 households and businesses are about to fall foul of Mayor Sadiq Khan’s extension of his ultra low emissions zone, obliging them to either replace their vehicle at vast expense or pay a £12.50 daily fine – again carrying the same effect as inflation.
In short, there are a lot of reasons why consumers and businesses alike have good reason to believe that current levels of inflation are not just transitory, but more deep-seated.
The Bank of England – along with its counterparts around the world – has its work cut out to persuade them otherwise.
Business
HSBC ‘being attacked all the time’ by online criminals – as boss ‘kept awake at night’ by cyber threat
The boss of one of the UK’s biggest banks says it is being attacked “all the time” by online criminals and he is kept up at night by cyber threats.
“It does keep me awake,” HSBC UK chief executive Ian Stuart told the Treasury Committee of MPs.
“Because we can be attacked and we are being attacked all the time.”
Money blog: ‘Highest ever’ bank switching offer launches
Mr Stuart said banks were spending “enormous” sums of hundreds of millions of pounds on IT systems – the biggest expense in their businesses.
“Cybersecurity is now very much at the top of our agenda,” he added.
Ian Stuart, chief executive of HSBC UK, appearing before the Treasury Committee. Pic: PA
Concerns were also highlighted by Lloyds Bank chief executive Charlie Nunn, who said financial fraud will get worse if banks cannot intervene to prevent it and social media and telecoms companies are not incentivised to halt it.
Mr Nunn said the UK “has become the home of fraud”, adding that the number of victims is “pretty disturbing” and “individual cases are harrowing”.
Major high street businesses, including M&S and the Co-op, have been hit by cyber attacks in recent weeks and had their operations impacted.
Please use Chrome browser for a more accessible video player
Who is behind M&S cyberattack?
Cybersecurity threats, however, were not behind the several-day outage at Barclays at the end of January, its UK chief executive Vim Maru said.
He added: “We’ve learned the lessons. We’re acting on the lessons, both work done internally, but also with help from third parties as well.
Account holders across the UK have suffered a spate of IT glitches from different banks around paydays this year.
Tens of millions of pounds on IT have been spent and customer glitches have fallen, Mr Maru said.
Please use Chrome browser for a more accessible video player
Could ageing tech be behind banking outages?
He added that the problem at Barclays was a software issue, saying: “We put a fix in place that means that we won’t have a recurrence.”
The steel tycoon Sanjeev Gupta is mounting a last-ditch bid to salvage his British operations after seeing an emergency plea for government support rejected.
Sky News has learnt that Mr Gupta’s Liberty Speciality Steels UK (SSUK) arm is seeking to adjourn a winding-up petition scheduled to be heard in court on Wednesday.
The petition is reported to have been brought by Harsco Metals Group, a supplier of materials and labour to SSUK, and is said to be supported by other trade creditors.
Unless the adjournment is granted, Mr Gupta faces the prospect of seeing SSUK forced into compulsory liquidation.
That would raise questions over the future of roughly 1,450 more steel industry jobs, weeks after the government stepped in to rescue the larger British Steel amid a row with its Chinese owner over the future of its Scunthorpe steelworks.
If Mr Gupta’s operations do enter compulsory liquidation, the Official Receiver would appoint a special manager to run the operations while a buyer is sought.
A Whitehall insider said talks had taken place in recent days involving Mr Gupta’s executives and the Insolvency Service.
Steel industry sources said the government could conceivably be interested in reuniting the Rotherham plant of SSUK with British Steel’s Scunthorpe site because of the industrial synergies between them, although it was unclear whether any such discussions had been held.
Listen to The World with Richard Engel and Yalda Hakim every Wednesday
Mr Gupta is said to have explored whether he could persuade the government to step in and support SSUK using the legislation enacted last month to take control of British Steel’s operations.
Whitehall insiders said, however, that Mr Gupta’s overtures had been rebuffed.
He had previously sought government aid during the pandemic but that plea was also rejected by ministers.
The SSUK division operates across sites including at Rotherham in south Yorkshire and Bolton in Lancashire.
It makes highly engineered steel products for use in sectors such as aerospace, automotive and oil and gas.
A restructuring plan due to be launched last week was abandoned at the eleventh hour after failing to secure support from creditors of Greensill, the collapsed supply chain finance provider to which Mr Gupta was closely tied.
Under that plan, creditors, including HM Revenue and Customs, would have been forced to write off a significant chunk of the money they are owed.
The company said last week that it had invested nearly £200m in the last five years into the UK steel industry, but had faced “significant challenges due to soaring energy costs and an over-reliance on cheap imports, negatively impacting the performance of all UK steel companies”.
It adds: The court’s ability to sanction the plan depended on finalisation of an agreement with creditors.
“This has not proved possible in an acceptable timeframe, and so Liberty has decided to withdraw the plan ahead of the sanction hearing on May 15 and will now quickly consider alternative options.”
One source close to Liberty Steel acknowledged that it was running out of time to salvage the business.
They said, however, that an adjournment of Wednesday’s hearing to consider the winding-up petition could yet buy the company sufficient breathing space to stitch together an alternative rescue deal.
A Liberty Steel spokesperson said on Tuesday: “Discussions continue with creditors.
“Liberty understands the concern this will create for Speciality Steel UK colleagues and remains committed to doing all it can to maintain the Speciality Steel UK business.”
The Insolvency Service and the Department for Business and Trade have also been contacted for comment.
-
Sports3 years ago‘Storybook stuff’: Inside the night Bryce Harper sent the Phillies to the World Series
-
Sports1 year agoStory injured on diving stop, exits Red Sox game
-
Sports2 years agoGame 1 of WS least-watched in recorded history
-
Sports2 years agoMLB Rank 2023: Ranking baseball’s top 100 players
-
Sports4 years ago
Team Europe easily wins 4th straight Laver Cup
-
Environment2 years agoJapan and South Korea have a lot at stake in a free and open South China Sea
-
Environment2 years agoGame-changing Lectric XPedition launched as affordable electric cargo bike
-
Business3 years agoBank of England’s extraordinary response to government policy is almost unthinkable | Ed Conway