In today’s briefing:
- UK: Bullishly Capping Yields with Energy
- Putin vs Europe – The Long War
- ECB: Leaping Towards Neutral
UK: Bullishly Capping Yields with Energy
- Inadequate energy supply for the winter has squeezed wholesale prices up, taking yields with it owing to the BoE’s fear of high spot inflation fuelling second-round effects.
- The UK government’s new energy price cap removes this as a direct source of inflation and a reason to hike rates near market pricing. It is tactically bullish.
- Price caps do not fix supply, so rationing remains likely. Along with the painful fiscal costs, this unimaginative scheme means bearish pressures may reassert in the winter.
Putin vs Europe – The Long War
- Last week, Vladimir Putin released a massive speech that clearly outlined his strategy to bring Europe to its knees.
- For decades, Europe’s business model has been largely structured around cheap energy and input costs used to produce good-quality manufactured goods to export around the world – Germany being a prime example of such business model.
- Due to globalization, ageing demographics and technological advances real output growth wasn’t necessarily spectacular and most importantly interest rates headed lower and lower over time.
ECB: Leaping Towards Neutral
- The ECB hiked by 75bps in response to the resilience of excessive inflation pressures. It agreed to raise rates further but that the latest leap would not be the norm.
- Some persistent slack in the ECB’s forecast means it is only currently seeking to reach neutral in 3-4 meetings rather than an outright tight setting, unlike other countries.
- It seems overly optimistic about activity’s resilience to rapidly rising rates and inflation, but fading peer pressure and market pricing are more likely to lead hikes to moderate.
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