Price control whack-a-mole

• Policymakers are ramping up price control responses.
• Central banks weigh more drastic rate hikes.
• What to look out for in the week ahead.

International policymakers play ‘whack-a-mole’ with global inflation.

Failure to keep prices in check and steeper demand freezing rate hikes become more likely,
raising the risk of a severe global economic downturn.

Monday morning wrap

Crude fell sharply on Friday evening – key benchmark Brent was down 5.5% for the session.

Lower energy prices led ASX:BHP (BHP) and ASX:WDS (WDS) lower in morning trade by 2% and 3.4% respectively.

Coal producers ASX:YAL (YAL) and ASX:WHC (WHC) were sharply lower in morning trade, down 4.4% and 9.4% respectively.

The People’s Bank of China (PBoC) kept its main lending rates unchanged as the country looks forward to post-COVID economic recovery.

A hard bounce in the crypto markets over the weekend suggests that the retail well hasn’t completely run dry.

Bitcoin is back up to the 20,000 handle at the time of writing.

Lenders reacted favourably to the consumer positive energy price news.

ASX:CBA (CBA) and ASX:ANZ (ANZ) were up 2% and 1.7% respectively at the open.

International energy supply responses

The US Department of Energy (DOE) continues its price-easing Strategic Petroleum Reserve (SPR) oil release programme.

The US will go from 90 days to 60 days of imports coverage by the end of September – if this action does not suppress prices, the DOE will be left with few options.

The release is made possible by the displacement of OPEC supply with Canadian heavy crude.

On Monday, Australian coal producers were lower on news that competing heavily discounted Russian cargoes are being offered to Indian and Chinese buyers.

The Gulf of Mexico Freeport LNG export facility outage due to a fire earlier this month continues to weigh on the onshore US gas market.

The logjam of gas previously intended for liquefaction and export sent the key Henry Hub reference price 7% lower on Friday.

European-specific responses

Europe has been among the hardest hit by soaring energy markets in 2022.

To alleviate gas shortages, Germany announced that it was firing up coal power stations as it attempts to build sufficient gas stocks before the winter with Russian gas displaced.

As a result of the announcement, European coal was higher by 5% on Friday and Dutch spot gas was 31% lower.

The policy response passed the tension from one market to the next without full resolution.

European coal reference price API2 is up 215% year to date.

Work to do

With geopolitical lines being drawn up across the globe, each leader is putting forward their terms for faction alignment.

Made plain by the Indonesian president Joko Widodo, food security is front and centre for developing nations.

Developed nations will need to get a grip on staple crop prices if they are to have the support of their developing counterparts.

Wheat, rice and soybean prices are all hovering on or around multi-decade highs.

Headway will need to be made in the critical food markets before any victory on prices can be declared.

Key tests for the market in the week ahead

Tomorrow morning, the Reserve Bank of Australia (RBA) governor Philip Lowe makes a scheduled speech, with the markets following closely for any shift in the economic outlook.

Japan’s monetary policy minutes are released tomorrow.
The Bank of Japan has been far more cautious than its central bank peers, and the Yen has suffered as a result.

The markets will watch closely for any change of tack.

On Thursday, Fed chair Jerome Powell testifies before congress, while the Fed bank stress tests are published, providing a window into the robustness of US financial institutions at such a critical juncture for markets.

Summary

The next few weeks and months are critical to how the global economy will shape up in the coming years.

Only a deftly coordinated international response will successfully navigate these challenging times.