BoE and Fed could shake it’s out of its torpor

There is a distinct lack of clarity about why there is a global shortage of gas just as the Northern Hemisphere enters its highest demand period.

Last winter was unusually cold in Europe and Asia which increased demand and it seems that Russia has decreased supply leading to accusations of manipulation.

Alternative sources of energy such as wind power have also been suffering from meteorological issues.

The effect of a prolonged shortage of gas could have devastating consequences for the recovering economies of the Eurozone and the UK.

In particular food supply will be badly affected with gas used in several processes from putting the bubbles in soft drinks to its use in slaughtering livestock in meat production.

There will be an obvious knock-on effect for other traditional forms of energy, which will struggle to take up the slack, with an inevitable price increase.

Since energy supply has been privatized in the UK, several low-cost suppliers have sprung up, which has led to increased competition for customers, but oversight has been lacking and now many of those suppliers appear to be close to going out of business since the level of rise in the cost of their supply has not been factored into their business models.

Business Secretary Kwasi Kwarteng has been holding meetings with the suppliers and the energy regulator OFGEM to try to find a path through this potential crisis.

According to reports, four major suppliers face going out of business unless the Government provides emergency funding with up to a million customers facing higher bills as a consequence.

The onset of winter will bring a series of issues for Boris Johnson and his new Cabinet to face. First there is the health issue with a possible resurgence of cases of Covid-19 which could be combined with a rise in winter flu cases.

Wholesale prices have skyrocketed, not just in the energy supply sector, with a scarcity of foodstuffs a real possibility. The speed of the global recovery due to the various vaccination programmes has created supply difficulties that have been exacerbated in the UK by Brexit and a lack of lorry drivers and other workers in the logistics sector.

When the MPC meets this week, it will be faced by the prospect of inflation rising more quickly while the issues facing the economy continue to grow.

Meanwhile, the pound remained fairly unmoved by the growing crisis in the energy sector as traders await the outcome of the MPC meeting.

Yesterday, it fell to a low of 1.3640 versus a stronger dollar, closing at 1.3656.

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The Fed is a long way from withdrawing support

The most recent economic data in the U.S. doesn’t point to the Fed doing any more than providing the market with guidance as to its present thinking when the FOMC meets today and tomorrow.

While inflation remains high despite falls over the past two months, the Fed will face pressure to withdraw support to try to deflate bubbles that are forming, particularly in the real estate sector.

Real estate is one of the most visible sectors of the economy. Despite being relatively slow moving, the price of homes can be affected by many factors and bubbles can quickly form.

It is also very easy to see how when the supply of hungry buyers suddenly dries up, often driven by rising interest rates or a sudden glut of supply that the bubble can burst very quickly leaving owners of new homes in a negative equity situation which can take years to correct itself.

The supply issues that have hit the world economy are also raging in the U.S. lack of raw materials and spare parts across several industries are also contributing to a slowing of the recovery. This will also be on the Fed’s agenda.

President Biden lifted several restrictions on areas of the travel sector yesterday, allowing visitors from the UK and EU to enter the country provided that they have been double jabbed.

This will prove to be a tremendous boost for the transatlantic travel businesses, which had seen an 83% drop-in activity during the ban on arrivals.

Fed Chairman Jerome Powell ordered an ethics review recently as it emerged that several of the Presidents of Regional Federal Reserves owned assets that could best be described as dubious investments, given their access to proprietary information.

It now emerges that Powell himself could be involved and now, as well as facing uncertainty over his reappointment and the economy, he will face calls from critics to submit to greater oversight.

While these issues bubble under the surface, the dollar continues to rally, coming close to a significant resistance level.

Yesterday, the dollar index rose to a high of 93.45, closing at 92.25. There is apparently a significant volume of sellers above 93.40, and it will take a major hawkish outcome from the FOMC for those to be overcome.

Lagarde close to reconsidering transitory inflation

The ECB, or more exactly its President Christine Lagarde, is apparently reviewing her options in the face of a far more rapid recovery in the economy.

Inflation is the most significant issue she currently faces, and this will not be helped by the increase in the wholesale price of gas, which is perhaps an even more significant issue in the European Union even than it is in the UK.

Germany has in the past been criticized for cosying up to Russia and agreeing a joining project to build a gas pipeline across its borders to supply Western Europe.

Now, with Russia under investigation for its possible manipulation of energy prices, this is not an issue Angela Merkel wanted as her last week in office arrives.

Lagarde is being questioned about why she believes that inflation is transitory, since it seems that there are several issues mounting that point to that definition being wide of the mark.

Demand continues to outstrip supply, the global shortage of semiconductors will begin to affect the high-tech sector, particularly in Germany but also France. Raw materials shortages show no sign of abating, while the wholesale price of gas seems to be a crisis in waiting.

While she received support from the Governors of the Central banks of Spain, Latvia, and Ireland recently, Lagarde can expect to be placed under severe pressure by the more hawkish members of the frugal five in the coming days and weeks.

There is a non-monetary policy meeting of the ECB this week. While it is hard to imagine what they discuss normally, this week it may be very different with a few unusual items added under any other business.

The euro is continuing to fall versus the dollar, and the proximity of significant support may be making those bullish for the single currency a little twitchy.

Yesterday, it fell to a low of 1.1700, and closed at 1.1725 having actually managed to show a small gain on the day.