‘New shock’ for European markets as surge in gas prices fuels inflation fears

LONDON — Another dramatic surge in natural gas prices appears to have dashed hopes that Europe’s inflation war will ease, and financial markets are now poised for higher prices, a faster pace of interest rate hikes, and more Preparing for a deep recession.

Just a few weeks ago, signs that U.S. inflation, which tends to spearhead change in the global economy, may be peaking, boosted stock prices and lowered government borrowing costs. As we approach the peak of GDP, we expect central banks to pay more attention to the economic slowdown.

Instead, the week began with US bank Citi’s forecast that UK inflation will surge to a nearly half-century high of 18.6% by January, dominating the front pages of UK newspapers on Tuesday.

This has landed as another explosive rise in natural gas prices showed little signs of slowing down.

Gas prices surged about 40% in August and about 300% this year.

“The key is energy, energy, energy.

“The United States and Europe are on different paths. We all knew that Europe’s Achilles heel was foreign energy, but now they are paying the price,” he said, adding that Russia’s commitment to gas He mentioned European dependence.

Nord Stream One Pipe
Pipes of the landing facility of the Nord Stream 1 gas pipeline in Lubumin, Germany, March 8, 2022. (Hannibal Hanschke/Reuters)

“Complete reversal”

So it’s no surprise that the mood turned sour quickly. Global stocks are down 4.3% from last Tuesday’s 3-1/2 month highs, the euro has fallen below $1 and US 10-year Treasury yields are back at 3%.

Monica Defend, head of the Amundi Institute, expects the euro to fall to $0.96 by December due to weak European economies.

Concerns are growing that central bankers gathered at this week’s Jackson Hole symposium are preparing for a more aggressive rate hike than previously expected. Investors are nervous as there is some uncertainty about when rate hikes will end.

“Markets are becoming more confident that recession will become the dominant theme and central banks will tighten policy in a more conciliatory or accommodative manner,” said Richard McGuire, head of rates strategy at Rabobank. Stated. “Since the beginning of last week, it has completely reversed.”

higher inflation

Let’s take a look at a market-based indicator of inflation expectations. Eurozone and UK short-term indicators hit all-time highs this week.

Shoppers load groceries into car
Shoppers prepare to load their cars with groceries outside a discount supermarket in Berlin, Germany, June 15, 2022. (Sean Gallup/Getty Images)

One long-term indicator monitored by the eurozone’s European Central Bank (ECB) rose to 2.24% on Tuesday after slipping below the ECB’s 2% target in July.

ECB policymaker Isabel Schnabel warned last week that inflation expectations may be ‘unfixed’, and central banks speak for a loss of confidence in banks’ willingness to do their jobs.

Société Générale strategist Kenneth Bleu called Schnabel’s comments a “key moment” and the central bank worries that inflation will not ease enough.

In the UK, similar inflation rose to 3.82% this week from 3.4% in late July.

Trading at its highest level since 2008, two-year UK government bond yields posted their biggest weekly gain since 2010 after last week’s data showed it reached 10.1% in July. Investors on Tuesday were betting that the Bank of England won’t stop raising rates until his June 2023, at around 4.2%. Ahead of the inflation reading, they expected a 3.25% peak in March.

Eurozone markets are also up about 50 basis points, up about 2%, where ECB rates are expected to peak next year, according to Refinitiv data.

Craig Inches, head of rates and cash at Royal London Asset Management, said the rise in market-based inflation indicators showed markets were eyeing the “next round of inflation”. rice field. Causes range from droughts in Europe to gas crises to pandemic-related supply constraints in China.

“There seems to be a lot of talk of more entrenched, embedded inflation,” he said, adding that markets were now asking themselves “how high do we need to raise interest rates?”

Inflation expectations are rising in the United States, but the outlook for Europe is even darker.

“European inflation was expected to pick up in the fourth quarter, but with gas prices rising again, the magnitude of the rise we are now facing is a new event,” said Holger Schmieding, chief economist at Berenberg. said.

“This is a new shock that was unpredictable a few weeks ago.”

By Tommy Wilkes, Yoruk Bahceli, Dhara Ranasinghe