Energy prices are giving cause for worry

All over the world, inflation figures continue to rise. Prices in the eurozone increased by 3.4% in August. This is the highest level in 13 years. In Germany last month, prices accelerated again with inflation reaching 4.1% – highest level in 29 years! The factors causing prices to rise are well known: the global economic recovery, difficulties in the commodity supply chain, production bottlenecks and a sharp rise in the cost of energy. The situation is identical in the United States, where the personal consumption expenditure indicator experienced its largest increase in thirty years. Officially, the ECB and the Fed are still claiming that inflation should only be temporary because it is based on transitory factors linked to the pandemic and the economic recovery. But some doubts are starting to creep in. ECB vice-president Luis de Guindos suggested that the rise in prices could be more lasting than expected due to the explosion in energy prices. Recently, many German workers went on strike to demand wage raises to help them cope with inflation. From now on, the wage indicator will be paid close attention – we could be increasing the risk of an inflationary spiral. High inflation figures may favour a rapid tightening by central banks of their measures to support the economy. At its last meeting in September, the Fed paved the way to begin tapering in November followed by a first rate hike next year. This prospect worked in favour of the greenback, which rose sharply last month to a 14-month high against the single currency at 1.1563 on the last day of September. In the first days of October, the dollar eventually lost some ground due to the difficulties the US government is having in passing its massive infrastructure investment plan. In addition, the problem of raising the debt ceiling remains unresolved, with Republicans taking the opportunity to try and weaken their opponents as midterm elections are scheduled a year from now.

In China, talk is still about Evergrande which has suspended trading on the Hong Kong stock exchange and which is starting to shed some of its assets. But another major cause for concern has in turn taken centre stage: power cuts. Increasingly frequent, they have led to energy rationing affecting 20 out of 31 Chinese provinces. The energy crisis is pushing factories to slow down or shut down, and in some cases to work at night. In September, despite full order books, activity in China’s manufacturing industry contracted for the first time for the first time since February. The Chinese government has ordered its energy companies to secure their winter supplies at any cost. Europe, which also depends on fossil fuels for its energy supply, will have to fight to import more Russian gas.

Crude oil is benefiting from Chinese energy demand and trading at a seven-year high. The expanded OPEC confirmed its timetable for a gradual increase in production as announced in July. Therefore, no further increase in production will take place, which helps to support prices. The Brent barrel traded this morning at $83 and the WTI barrel at $79.

Helped by the recent decline of the greenback, by its status as a hedge against inflation and by fears of stagflation, i.e. high inflation accompanied by weak growth, the price of gold edged up slightly to $1,753 per ounce. It had dropped to $1,721 last week. The price of the yellow metal has been moving in a bearish channel since early September after failing to break through the $1,836 resistance.

As for the central banks, Denmark lowered its main key interest rate by ten basis points to -0.6%. The objective is to weaken the currency of this AAA rated country to maintain its peg with the euro. The Danish krone has in fact been moving a controlled fluctuation band of 2.25% around the euro. Most of the other central banks, on the other hand, are preparing to reduce their monetary stimuli. New Zealand increased its key rate from 0.25% to 0.50%, in line with expectations. On the other hand, Australia held its rate steady at 0.10%, its historic low. The RBA does not anticipate a rate hike until 2024.

This morning, the dollar resumed its advance against the euro and US Treasury bond yields are rising. The ten-year rate yield stands at 1.57% and the 30-year yield at 2.14%. These are the highest levels since June.