Analysts 'see' inflationary pressures again from energy
Photo. RES – PE
Continued turmoil in bond markets is augured by the recent rise in the price of natural gas, which, although due to seasonal factors, is rekindling the fear of an acceleration in inflation and subsequent further interest rate hikes. Market analysts are predicting further interest rate hikes aimed at curbing inflation and inevitably further volatility in bond yields. The situation is similar in the Eurozone and the USA, as the same uncertainty prevails regarding the next moves of the central banks.
In Europe, concern was triggered by the jump in the price of natural gas by 30% in just one day. Thus, the banks ING Groep, Rabobank and Saxo Bank warn of the risk of a new acceleration of inflation and anticipate investors for new interest rate increases by the ECB. Speaking to Bloomberg, Benjamin Schroeder, an interest rate analyst at ING, points out that “inflation alarm bells are suddenly ringing again”, as “recent gas price increases outline the risk of new supply gaps”.
Markets currently give the ECB a 40% chance of another 25 basis point rate hike in September, while Rabobank reckons the ECB “will need to show more determination” to curb inflation, given of the risk of a new energy shock.
“Energy is a really important target for the ECB,” comments Lyn Graham Taylor, analyst at Rabobank, while Althea Spinozzi, strategic analyst at Saxo Bank, predicts that “energy will keep inflation high and above target of the central bank”. Mrs. Spinozzi emphatically adds, after all, that “winter is coming and the demand for natural gas will increase”, but she estimates that the ECB will maintain a wait-and-see attitude for some time to come. At the moment, of course, inflation is decelerating in the Eurozone and according to the latest estimates it fell in July to 5.3%, from 5.5% in June. It remains, however, still alarmingly higher than the 2% target. At the same time, Europe has abundant energy reserves, but is still paying four times the cost compared to equivalent prices in the US and about twice as much as pre-pandemic levels.
A similar climate of concern prevails in the US, where investors discount large fluctuations in prices and yields of American government bonds. The reason is the uncertainty about the course of the economy, which may affect the movements of the federal bank and keep interest rates at high levels for longer than has been estimated so far. Fed officials are already saying that “a lot of work” still needs to be done, as inflation in the superpower remains at levels well above the target. Indicative of the market's concern is the recommendation of strategic analysts at Barclays to investors to sell the two-year US government bonds they have in their portfolio. They estimate that interest rates will remain at high levels this year, contradicting recent optimistic estimates that the Fed will initiate a round of interest rate cuts starting in March 2024. Already, ten-year US Treasury yields are on the rise and heading towards high levels of last year.
