Introduction: Oil hits $95 per barrel amid supply worries
Good morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The oil price is continuing its march towards $100 a barrel for the first time in almost a year, creating new inflationary headaches for central bankers.
Brent crude, the international benchmark, has pushed over $95 per barrel this morning, the highest since November 2022.
Oil is being driven up by concerns of a supply deficit, following recent output cuts by Saudi Arabia and Russia, which have been extended until the end of this year.
Kyle Rodda, senior financial market analyst at capital.com, says:
Despite looking technically overbought, the upside momentum looks strong, with a combination of supply and demand drivers supporting the rally. Of course, the big story here is the expected shortfall in supply flagged by OPEC+ last week.
The cartel says it sees a deficit of 3 million barrels per day in the final quarter of this year, which would be the largest since 2007. The increase in oil price is fuelling higher yields, especially at the long end, although equity markets have proven surprisingly resilient.
Brent crude began 2022 below $80 per barrel, before soaring to around $130/barrel after Russia invaded Ukraine last March – fuelling the surge in inflation last year.
Oil did then fall back, but has been climbing since the end of June, pushing up petrol and diesel prices in the UK, for example.
Higher oil prices risk making inflation more persistent, just at a time when central bankers are inching towards ending their cycle of rising interest rates. The US Federal Reserve may leave borrowing costs on hold tomorrow, though the Bank of England may vote to hike again on Thursday.
$100 per barrel is in sight now. And Bjarne Schieldrop, chief commodity analyst at SEB, predicts that oil demand will weaken should prices continue to rise, over $100/barrel.
Schieldrop says:
“The overall situation is that Saudi Arabia and Russia are in solid control of the oil market. The global market is either balanced or in deficit and both crude and product stocks are still low.
Thus we have a tight market both in terms of supplies and inventories, so there should be limited downside in oil prices. We are highly likely to see Dated Brent moving above USD 100/b. It is now less than USD 5/b away from that level and only noise is needed to bring it above.
The agenda
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10am BST: OECD’s global economic outlook
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10am BST: Eurozone inflation report for August
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2.15pm BST: Business and Trade Secretary Kemi Badenoch appears before the Business & Trade Committee
Key events
In a boost to consumers, the corn price has dropped to a three-year low today.
The most-active corn contract on the Chicago Board of Trade has dipped by 0.7% today to around $4.68 a bushel this morning, after touching a near three-year low for a second straight session.
Reuters has the details:
Chicago corn slipped on Tuesday to remain at its lowest levels since December 2020 as an advancing U.S. harvest kept attention on ample international supply following a record Brazilian crop.
Wheat futures extended losses from Monday as competitive Russian prices and moves to load grain from war-torn Ukraine underscored ongoing competition from Black Sea supplies.
Soybeans slipped to a one-month low, pressured by the early stages of the U.S. harvest as well as monthly crushing data that disappointed traders.
Consultancy Agritel said.
“Corn and soybeans are slipping back as harvest pressure begins in the United States.”
Just hours after publishing its scoop on the FCA’s inquiry into debanking, the Financial Times now have a column on the issue from the regulator’s CEO himself.
Nikhil Rathi, chief executive of the Financial Conduct Authority, writes that the regulator “decided to revisit the issue” of debanking after a flurry of reports that banks were closing accounts based on their customers’ political beliefs.
Rathi says the FCA will carry out more work, having its initial review found politicians were not being denied accounts because of their views.
So far, data from 34 banks, building societies and payment companies does not point to a systemic problem of people being de-banked because of their political views. According to that information it has not been the primary driver for any personal account closures.
We will undertake further checks to be doubly sure and to understand more about what are described as “reputational” factors behind a number of closures.
Rathi says banks need to get the balance right, when considering concerns about financial crime and their tolerance for risk.
He warns:
In the face of rising financial crime, the FCA is working with the government and others to clamp down on the misuse of financial services. There is a risk, however, that as parliament introduces measures such as a new offence of failing to prevent fraud, banks err on the side of caution.
Our work has shown that financial crime and risk tolerance are the main causes of closure for active accounts. We need an open conversation about getting the balance right.
Read the @FinancialTimes‘s article with our Chief Executive, Nikhil Rathi.https://t.co/gk1clSZHxQ
— Financial Conduct Authority (@TheFCA) September 19, 2023
Kalyeena Makortoff
It’s official: The UK’s financial regulator has found no evidence showing banks have shut or denied accounts to customers based primarily on their political beliefs.
That’s according to a preliminary review launched in the wake of the Nigel Farage debanking row, which has just been published.
As flagged this morning… despite growing concerns that customers have been quietly discriminated against due to their political views, the Financial Conduct Authority’s (FCA) said initial findings showed the primary reason for accounts being closed, suspended, or denied was either that the account was inactive, or that they had concerns that the customer was involved in financial crime.
The FCA’s chief executive Nikhil Rathi said.
“While no bank, building society or payment firm reported to us that they had closed accounts primarily due to someone’s political views, further work is needed for us to be sure.
That will involve verifying the initial data gathered from 34 banks, building societies and payment companies, covering the year to June, including cases where accounts were closed because the customers posed a “reputational risk”.
Conservative MP Danny Kruger, though, isn’t impressed with the FCA’s work:
So the regulator who presided over the political debanking scandal has failed to find evidence of it. They simply asked banks if they were guilty without asking those who thought they might be victims to come forwards. We now need to ask serious questions about the FCA itself https://t.co/E2UhJrpWDu
— Danny Kruger (@danny__kruger) September 19, 2023
We’ll find out tomorrow morning how the UK’s inflation rate compared with that of the eurozone.
The UK’s annual CPI index is expected to rise to 7.0% in August, up from 6.8% in July, driven by an increase in clothing costs and higher wages.
In terms of actual data …
Eurozone inflation down a touch to 5.2% last month… core inflation down too but a little higher at 5.3%
EU-wide inflation down to 5.9%.UK inflation in July was 6.8%, and August figures will be released tomorrow morning. Some fears it might go up.
— Faisal Islam (@faisalislam) September 19, 2023
Tata execs due to discuss steel job cuts
Alex Lawson
A trio of top bosses from Indian conglomerate Tata are to meet with unions in a plush London hotel to determine the future of thousands of UK steelworkers tomorrow morning.
Last week it emerged that, as part of a £500m UK government support package, as many as 3,000 workers at Tata Steel could lose their jobs across three sites, including the vast Port Talbot steelwork in south Wales.
The Tata execs – finance chief Koushik Chatterjee; Raghav Sud, its chief of financial strategy and governance, and Rajesh Nair, who is a UK director – will meet with representatives from the Unite, GMB and Community unions.
It is understood they will meet in the luxurious surroundings of St James’s Court Hotel – a five star hotel near Buckingham Palace, a world away from the grit of industrial steel production.
Unions are expected to push against any compulsory redundancies being enforced, with many employees already expected to take voluntary redundancy. About 2,000 jobs expected to come from Port Talbot’s 4,000-strong workforce.
The decarbonisation plans for the steelworks are also expected to be discussed.
As part of the deal, Tata is expected to inject about £725m to help the company transition to greener production methods.
Here’s Charles Hepworth, investment director of GAM Investments, on this morning’s eurozone inflation data:
“The final reading for EU CPI in August slowed just a little bit more than the previous initial estimate, which indicated inflation on an annualised basis fell to 5.2% versus the initial reading of 5.3%.
It still remains stubbornly above the European Central Bank’s target rate of 2%, and with an accompanying oil price spike seen over the last few months, this will continue to raise headaches for the ECB’s Governing Council. The direction of travel however in inflation will undoubtedly be the welcome silver lining amid this cloud of inflation uncertainty.
Rates are now at the expected peak level in the Eurozone and we should expect them to remain at this level for some time.”
Full story: Germany will suffer worst from world economic slowdown, says OECD
Richard Partington
Germany is expected to experience the heaviest blow from a slowdown in the world economy driven by higher interest rates and weaker global trade, the Organisation for Economic Co-operation and Development has warned.
In downbeat forecasts for the world economy, the Paris-based organisation said Europe’s largest economy was likely to be the only G20 country apart from Argentina to shrink this year during a wider international slowdown.
After a stronger-than-expected start to 2023, helped by lower energy prices and China’s easing of Covid restrictions, the OECD said activity across leading countries was slowing towards the end of the year before a weaker 2024.
The impact of higher interest rates to tackle sky-high inflation after Russia’s invasion of Ukraine has added to pressure on households and businesses, while Germany’s manufacturing-heavy economy grapples with weaker global trade volumes.
More here:
The OECD has also predicted that the UK will see the highest inflation rate of the world’s G7 advanced economies this year.
In its new forecasts, just released, the OECD predicts UK inflation of 7.2% for 2023, increasing its previous forecast of 6.9% from June.
This would be the fastest rate across the G7 and third fastest across the G20.
Chancellor of the Exchequer Jeremy Hunt said:
“Today the OECD have set out a challenging global picture, but it is good news that they expect UK inflation to drop below 3% next year.
“It is only by halving inflation that we can deliver higher growth and living standards.
“We were among the fastest in the G7 to recover from the pandemic, and the IMF (International Monetary Fund) have said we will grow faster than Germany, France and Italy in the long term.”
But Liberal Democrat spokeswoman for Treasury and business Sarah Olney is unimpressed by the OECD’s prediction that the UK will only grow by 0.3% this year (the third slowest in the G20, after Germany and Argentina).
Olney says:
“This damning report shows that under the Conservatives the UK economy is stuck in the slow lane.
“We’ve had zero apology from Liz Truss for trashing the economy, and now zero plan from Rishi Sunak to fix it.
“It’s time for a proper plan to grow the economy and tackle the cost of living.”
The rising oil price threatens to undermine the falling inflation rate in the eurozone, warns Richard Flax, chief investment officer at Moneyfarm.
Flax says:
Eurozone inflation fell faster than initially expected in August 2023, with the final data reading 5.2%. This is down from 5.3% in July and lower than the initial estimate of 5.3%. Compared to July, inflation fell across 15 countries, rose in 11, and remained stable in one. The significant contributors were food, alcohol, and tobacco (9.7% in August vs 10.8% in July) and services (5.5% in August vs 5.6% in July), while energy prices declined by 3.3% YoY.
However, a fresh inflationary headwind is on the horizon globally with oil prices continuing the climb towards $100 a barrel for the first time in a year. Brent crude is currently at an upwards of $95 a barrel, driven by concerns of a supply constrains after output reductions from Saudi Arabia and Russia have been extended to the end of the year. With OPEC+ announcing a deficit of 3 million barrels for Q4 2023, $100 per barrel remains very much in sight.
The elevated cost of energy will be concerning for central banks as this can add to the inflationary pressures at a time when they are aiming to end the tightening cycle.
There is a strong consensus that the Fed may leave borrowing costs unchanged tomorrow and not rule out a future hike, but the BoE may favour a rate hike on Thursday.
The drop in eurozone inflation to 5.2% last month could encourage the European Central Bank to stop raising interest rates, having lifted them to record highs last week.
Craig Erlam, senior market analyst for UK & EMEA at OANDA, says:
Eurozone headline inflation was slightly lower than initially reported in August while core was unrevised and is now modestly higher.
Both are expected to fall going into next year and today’s revisions are unlikely to alter the view of the ECB which has already decided that no more rate hikes will likely be needed. As with all favourable data though, it may come as a small relief that surprises in the data are finally in the right direction.
Euro-area inflation slowed last month after all, according to revised data that will support European Central Bank officials saying no more interest-rate hikes are needed https://t.co/XeP5EKt3Ph
— Bloomberg Economics (@economics) September 19, 2023
OECD lifts global growth forecast
The OECD has raised its forecast for global growth, thanks to a stronger than expected US economy, and despite a weakening German economy.
The Paris-based body has lifted its forecast for global GDP growth to 3.0% this year, up from the 2.7% forecast in June, but still slower than the 3.3% expansion in 2022.
But, global growth is expected to slow to 2.7% in 2024 – down from its estimate of 2.9% in June.
The OECD is rather more upbeat about the US economy than three months ago – it now predicts US GDP will grow 2.2% this year rather than the 1.6% it forecast in June. That’s because America’s economy has been more resilient than expected as US interest rates have been raised higher.
But China’s growth forecast for 2023 has been cut to 5.1% this year, down from 5.4% earlier forecast, with a slowdown to 4.6% next year.
Germany’s economy is now expected to shrink by 0.2% this year, down from a previous forecast of flat growth, followed by 0.9% growth in 2024 (down from 1.3% previously).
The UK economy is still expected to grow by just 0.3% this year, with 2024’s growth forecast revised down to 0.8% from 1%.
The OECD warns there is a risk that inflation will be ‘more persistent than expected”:
Headline inflation has continued to come down in many countries, driven by the decline of food and energy prices in the first half of 2023. However, core inflation – inflation excluding the most volatile components, energy and food – hasn’t significantly slowed. It remains well above central banks’ targets.
A key risk is that inflation could continue to prove more persistent than expected, which would mean interest rates need to tighten further or remain higher for longer.
Core inflation across the eurozone, which strips out energy, food, alcohol and tobacco, dropped to 5.3% per year in August, from 5.5% in July.
Euro area inflation declined slightly on a YoY basis but remains elevated and far from the ECB’s target
Aug-23 HICP:
EA: 5.2% headline YoY (down from 5.3% in July and from 9.1% Aug-22) and 0.5% MoM; Core HICP is at 5.3% YoY
EU: 5.9% headline YoY (down from 6.1% in July… pic.twitter.com/znyLs5Lm1A— Nikolay Kolarov, CFA (@libertniko) September 19, 2023
Although the rate of eurozone inflation fell last month, that doesn’t mean prices are falling, of course.
On a monthly basis, eurozone consumer prices rose by 0.5% during August.
Eurozone CPI (yoy) for August actual: 5.2% vs 5.3% previous; est 5.3%. Eurozone CPI (mom) for August actual: 0.5% vs 0.6% previous; est 0.6%. #stockmarkets
— Millions Capital (@Millionscapital) September 19, 2023
