25 August 2022: Truss’ Chancellor backs energy plan

GBP – Kwarteng to recommend support for freeze of energy cap

Outgoing Prime Minister Boris Johnson visited Ukraine yesterday in what will be one of his last official engagements in office. He called upon the UK and the rest of Europe to endure the current energy emergency to defeat Russian leader Vladimir Putin, who is using his country’s gas reserves as a weapon of war.

The man who is tipped to be the new Chancellor of the Exchequer should Liz Truss win the Conservative Party leadership contest, current Business Secretary Kwasi Karteng, has been holding talks with energy sector bosses to find a solution to the rising cost of energy, in particular the wholesale price of gas.

One solution that has been suggested has been a freeze being placed on the energy cap for two years. The plan which has been put forward by the CEO of Scottish Power would cost up to £100 billion over the twenty-four-month period.

The plan involves government guarantees for loans that would enable energy companies to borrow from commercial lenders at competitive rates to buy gas from suppliers at the historically inflated cost without having to pass on the cost to consumers.

The so-called deficit fund would help both the cost-of-living crisis and the continued rise in inflation that was tipped to reach 18% earlier this week.

A new level for the energy cap to begin on October 1st is due to be announced tomorrow. It is currently £1,971 a year for a typical household and is expected to be increased to around £3,400 from the Autumn.

The cap is also due for review in January and April next year, amid fears it could eventually top £6k.

Russia has announced that it will close its Nordstrom one pipeline which supplies are large proportion of Europe’s gas for three days next week, ostensibly for essential maintenance, although Moscow is suspected to be using the closure for political means in an effort to maintain pressure over support for Ukraine in its effort to repel the invasion.

The energy regulator Ofgem has been criticized recently for not putting the interests of the consumer first. As part of the protest, one of its non-executive directors resigned, citing the inability of the regulator to strike the right balance between suppliers and consumers.

Going into the final Bank of Holiday before Christmas, the pound fell to a low of 1.1755 yesterday, closing at 1.1799. It is likely that traders will be sidelined by the prospect of Jerome Powell’s speech later today and the prospect of the long weekend.

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USD – Fed Chairman grappling with confusing data releases

The Chairman of the Federal Reserve, Jerome Powell, will make the keynote address at the Central Bank’s annual symposium at Jackson Hole in Wyoming tomorrow.

He is expected to commit to the Bank staying the course that it has set to bring inflation under control.

Since it began tightening monetary policy by raising short-term interest rates and reducing the size of its balance sheet, there has been no discernible effect on headline inflation. This has drawn calls for a pause in the policy or, at least, a reduction in the size of the increments.

The minutes of the last meeting of the FOMC appear to suggest that after another seventy-five basis points at the next meeting, such a plan will be considered.

It is hoped that in his speech, Powell will flesh out his ideas. In the run-up to Jackson Hole, there have been noticeably few comments made by FOMC members, which also appears to suggest that the Chairman is going to bring a degree of clarity.

Recent data releases have been a little confusing for the market, with some numbers suggesting that the common prediction that the economy is heading for a recession occasionally being confounded by figures that are stronger than expected.

The housing market is reacting predictably to rising interest rates as mortgage costs are rising, although the recent employment reports have remained strong.

Weekly jobless claims figures appear to be topping out after a recent rise from an average of around 200k per week to the current level, which is closer to 250k.

While Jackson Hole will make the headlines, there is an update due for release due later today for Q2 GDP. It is expected that the fall of 0.9% reported recently will be improved very slightly to 0.8%. While this is only a marginal improvement, it may be taken as a sign that if the economy is in a genuine recession, it will be seen as more of an adjustment following the economy’s emergence from the Pandemic.

The dollar index corrected a little further yesterday, following the rally seen earlier in the week.

It reached a high of 109.11 but was unable to sustain any momentum and fell back to close only a little higher on the day at 108.64.

EUR – Very few buyers without an ECB guarantee

The new tool recently announced by the European Central bank to ensure that those nations that are heavily indebted can access Capital markets has not yet been fully approved by the Central bank’s Governing Council.

It is feared by several eurozone members that they will be expected to write a blank cheque that allows nations such as Italy to expose them to risks that are way beyond any conservative level of financial discipline.

For that reason, since there is no guarantee from the ECB, the debt markets have dried up with little new issuance taking place. There has been no blow out in the spreads that are being charged to the more heavily indebted nations that was feared, but so far, the resolve of the ECB hasn’t really been tested.

It is typical that the authorities will wait until there is a genuine crisis looming before acting, just as they have on several occasions in the past. This brinkmanship has been used in the past to force nations like Germany and Austria to provide support, occasionally against their better judgement and certainly not in their best interests.

The latest data for consumer confidence has been published this week. It showed an improvement from -27 to -24.9. While that can hardly be considered any reason for celebration, the best that can be said is at least it may have reached its nadir, although with the continued concerns over not only the cost, but also the supply of energy during the approaching winter months, that is not even guaranteed.

The data did confound predictions, which had been for confidence to fall further to -28.

It is hard to imagine that against such a background of current and future concern that the ECB would be considering not just a hike in interest rates but a further fifty-basis-points. However, that is the market’s view of the most likely outcome of the meeting, which will take place in two weeks’ time.

Inflation is considered by the more hawkish nations of the Eurozone to be the single biggest threat to the stability of the region, and for that reason they are willing to drive it deeper into a recession which has already started in all but name.

The euro now appears to be finding a little support below parity with the dollar, although this may be due to the level of uncertainty that is being engendered by the proximity of Jerome Powell’s upcoming speech.

Yesterday the single currency closed virtually unchanged at .9967 having run into sellers just shy of parity but seeing buyers appear around 0.9910.