Thu, Sep 29, 2022 @ 09:00 GMT
HomeContributorsFundamental AnalysisDemand Destruction Push Energy Prices Lower

Demand Destruction Push Energy Prices Lower

Market movers today

All eyes will be on the US CPI for August, which is one of the last key inputs for the Fed’s decision to hike either 50bp or 75bp at their meeting next week. We look for another print of -0.1% m/m in the headline CPI bringing the y/y rate down to 8.0% from 8.5% in July (in line with consensus). But focus will be on the core CPI where consensus looks for a rise of 0.3% m/m, same as in July. We see some upside risks to this estimate.

German ZEW expectations will probably show that the recession risk further increased in September in light of the worsening energy crisis.

In Norway, Norges Bank releases the Regional Network survey.

The 60 second overview

Energy markets: Yesterday, we wrote in our morning mail about the five proposals discussed by the EU energy ministers on Friday. Bloomberg reported yesterday that the EU Commission is now working on a mandatory target to cut power use and a plan for windfall taxes. The whole package is expected to be presented this week though it will still need to be signed off by member states. EU Commission President von der Leyen is expected to unveil more details tomorrow when she holds her annual State of the Union Speech.

Demand destruction: Yesterday, we saw that the Dutch TFF gas future for the first time in a month traded below EUR 200 MWh down more than 33% from the peak. The EU proposals to introduce mandatory demand cuts by member states might have helped push prices lower. However, we would argue that we are currently seeing what commodity analysts call “demand destruction”. Corporates and households in the EU are simply cutting back on gas and power consumption due to the high prices. An indication of this is that the price of carbon emission (EUA) in the EU has dropped more than 25% from the peak in August. The drop comes despite the switch from natural gas to other fossil fuels which boost the demand for carbon emission as natural gas has a significantly lower CO2 content. That said, the market might also speculate that the EU would delay the proposed tightening of the EU carbon market. Demand destruction and recession fears are also seen in metal markets, crude oil prices and freight markets where prices have seen steep declines over the last month.

Risk appetite: Yesterday, the lower energy prices and expectations that US inflation in August – released later today – would drop m/m for the first time since May 2020 supported risk appetite. The same did New York Fed’s survey of consumer expectations that showed a marked decline in one- and three-year inflation expectations from 6.2 percent and 3.2 percent to 5.7 percent and 2.8 percent. European yields where pushed lower, EU and US equites performed and EUR/USD moved higher. Global equity futures trade flat this morning and EUR/USD has been stable around 101.30 overnight.

FI: European bond yields declined yesterday from the long end of the curve and there was decent curve flattening between 2Y and 10Y as well as 2Y and 30Y. The Schatz ASW-spread widened once again, while the Bobl and Bund ASW-spread tightened. Part of this tightening could be due to solid issuance in the primary market.

FX: Yesterday’s session was characterised by another leg of USD weakness while SEK stood out as the big winner. EUR/USD broke above 1.01, tested 1.02 before settling lower during the US session. Central European currencies continue to benefit from the drop in natural gas prices while USD/JPY has settled close to 143. EUR/NOK is trading just below 10.00 while EUR/SEK has reached the low 10.60s.

Credit: Credit markets started the week in risk-on mode. Itrax Main tightened 4.3bp to close at 103bp, while Itrax Xover tightened 20.2bp to close at 503.7bp. Monday also saw good new issue flow in European corporate bond markets, with both Investment grade financials and corporates, making use of the good sentiment to print new debt.

Nordic macro

In Norway, the Norges Bank’s regional survey is expected to show moderate growth prospects, thanks to a combination of capacity problems and weaker demand. Given the risk that high capacity utilisation and a tight labour market pose to wage and price formation, and hence to rates, attention will centre on the indicators for capacity constraints and labour shortages. These indicators were at their highest since 2007 in the previous round in May and well above normal levels. We reckon that growth slowed in several sectors over the summer, including construction, retail and parts of manufacturing. We therefore believe that the economy is under slightly less pressure now than it was in May.

Danske Bank
Danske Bank
This publication has been prepared by Danske Markets for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Markets´ research analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for private customers in the UK or any person in the US. Danske Markets is a division of Danske Bank A/S, which is regulated by FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange. Copyright (©) Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.

Featured Analysis

Learn Forex Trading