Economic damage will be significant from energy crunch – the commentary is not particularly robust out there on the implications of the ongoing energy crunch – particularly for China and Europe, but will mean a significant brake on the recovery at best and something on the scale of the 1970’s energy crises if a significant portion of the rise in gas and power prices already in the bag are sustained over the next few months. Already, energy intensive industries are shutting down production, while consumers and businesses have yet to alter behavior as electricity and gas prices, in most cases, don’t rise until periodic resets, and some energy bills are only assessed quarterly (at least they are here in Denmark). The price reset in Italy, for example, started on Friday in Italy and was set almost 30 percent higher for electricity, with gas prices only set to rise less than 15% even as the most closely watched gas price is up several multiples of its normal range in Europe.
And Europe has yet to really turn on the heat this fall, much less receive utility bills that reflect these prices. In short, the issue will hit Europe and elsewhere with a bang in coming months and could actually provide the spark for Europe to go big on the infrastructure investments and vision needed to reduce its vulnerability on this issue. Stay tuned. In China, by the way, ports are quietly accepting shipments of Australian thermal coal after authorities discouraged imports on Australia’s questioning of the Covid virus origins, as the country seeks to boost low thermal coal stockpiles for the winter. This is an AUD positive and comes after Australia posted a record trade surplus in August of some AUD 15.1 billion. And even if many consumers are set to be shielded from rising prices, this only subtracts from potential investments in solving the problem or improving productivity.
UK Prime Minister sends a loud populist signal on wages and is supporting higher wages for the lowest earners and, for example, for industry to improve its supply chains through rising productivity, wages and skills rather than via “low age, low growth, low skills and low productivity, all of it enabled and assisted by uncontrolled immigration. This “leveling up” approach could help drive a wage-price spiral in the UK and sterling is in a relatively positive mood in the crosses as UK short rates are up sharply recently and since yesterday, with 2-year UK swaps trading 78 basis points as Johnson speaks today.
Table: FX Board of G10 and CNH trend evolution and strength
We’ve had a big further spike higher and then retrenchment intraday in some energy prices – interesting to note the NOK and CAD stumbling a bit intraday today – the market may have been overdoing it there in recent days. Elsewhere, interested to see the status of the JPY relative to the US dollar on the other side of the rest of the US data this week through the Friday US jobs report.