- Weekly market update
- 5 minute read
A good week for
- Oil gained a further 3.0% in US dollar terms and sterling
- Equities and bonds increased
A bad week for
- Gold declined modestly
- The US dollar weakened -0.14% on a trade weighted basis
China has faced power shortages in recent weeks, with more than half of provinces rationing energy, mostly generated from coal. High demand for Chinese goods has seen industry consume more power, while domestic supply decreased in 2020 and 2021, due to pandemic and weather disruption, and stricter enforcement of coal production limits. Tighter environmental and safety rules have further discouraged private mining companies from expanding operations. Greater demand for coal has pushed up the price paid by electricity plants, unable to pass on higher costs due to electricity price controls, making generation uneconomical. Now, the wholesale electricity market will be liberalised and price caps loosened, while the government has instructed coal miners to maximise output. These measures may be insufficient to correct China’s energy imbalances, and also conflict with Beijing’s aim of carbon neutrality by 2060
August’s labour market data painted an optimistic picture of employment ahead of the end of the furlough scheme. Unemployment declined to 4.5%, and the number of employees increased, boosted by self-employed workers moving to salaried roles. The Office of National Statistics estimates wages grew between 4.1% to 5.6% year-on-year (y-o-y) in August, ahead of inflation and supporting consumption spending. More job vacancies signals a tight labour market, though the end of the furlough scheme should free up workers to fill these roles. Participation also remains low, with c. 500k more people ‘economically inactive’ since 2019. Almost 40% of these are students, who will return to the labour market eventually, while high wages and a better health situation may tempt other workers back into work.
US inflation ticked up unexpectedly in September, rising to 5.4% y-on-year. The headline index was pushed up by higher food prices and energy costs. However, core CPI, which excludes these items stayed flat at 4%. Here, higher rent costs were offset by lower prices across hotels, airfares, clothing and autos. Nonetheless, stronger inflation has emboldened the US Federal Reserve’s Open Markets Committee to take a more hawkish stance on monetary policy. September’s minutes reiterated this, commenting on the economy’s “resilience in the face of the recent wave of infections”, a risk which has worried committee members. The Fed is expected to begin to slow the pace of asset purchases by the end of the year.
Having surged, shipping prices show signs of abating. Freight costs have been pushed higher this year by the recovering demand for goods, as consumers splurged on ‘things’ rather than experiences which were restricted. The pandemic also caused disruption, along with the blockage of the Suez Canal earlier this year. Constrained supply pushed the Baltic Dry Index, an indicator of shipping costs, to its highest level since 2008. Last week the index began to decline, with lower iron ore and coal cargos weighing on pricing for “capesize” vessels. However, if Chinese coal demand causes imports to surge, prices could again be pushed higher.
The International Energy Agency (IEA) has warned that underinvesting in green energy poses risks to the environment and the economy. The IEA was founded in response to the 1970’s oil crisis and seeks to ensure the global economy has sufficient energy. The agency warned that governments must incentivise businesses to invest in green energy to avoid “more and more turbulence in the energy markets". It estimates that $4 trillion of investment is needed each year, in order to limit global warming to 1.5 degrees, as targeted in the Paris Agreement.
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