27 Nov 2024
Jonathan Platt, Head of Fixed Income
Last week saw the UK energy price cap raised for households, coming into effect in January. Consumers may not feel it – but we are lucky. Industry has no such protection and, as a consequence, we face the highest cost for electricity amongst our peer group. Looking at the latest government statistics, the UK is a clear outlier with only Slovakia approaching our levels. Relative to a median price derived by the International Energy Agency, the UK industrial electricity prices were 54% higher than the average in 2023.
The data shows that UK energy consumption has fallen sharply over the last 25 years. Is this the UK leading the way in efficiency or just a sign of outsourcing to cheaper areas? Unfortunately, it appears to be more about the latter. In my view, there really needs to be a serious discussion about the cost of energy for business as the differential with our peers is not compatible with economic success. The UK’s net zero commitments rightly have support from a wide range of experts, political parties and the public. Climate change is happening and the UK is taking the lead but we have failed to recognise the all of the consequences and to consider the economic disadvantages we face in the generations-long transition to lower carbon. This needed to be subject to more vigorous national debate both within and outside Parliament.
As if to highlight our vulnerability, early November saw the renewable contribution to UK electricity output fall below 5%, as days were cloudy and windless. The likely US pivot back towards fossil fuels under President Trump and the ongoing exploitation of cheap fossils fuels in Asia will only increase the competitive pressures. Mandating UK pension schemes invest more in domestic companies is not going to work if better returns can be achieved elsewhere. Perhaps the cost advantage of energy explains the success of US stock markets and the diminishing role of the London Stock Exchange – rather than listing rules? Microsoft’s deal with the Three Mile Island nuclear plant is the latest illustration that energy costs matter.
Energy costs also were behind the jump in UK inflation, with the headline rate rising from 1.7% to 2.3%. Disappointingly, services CPI ticked up to 5.0%. Transport inflation was strong, driven by air fares and second-hand cars but overall upward contributions were widespread. Of the 12 main categories, eight saw upward movement. This is not what the Bank of England was hoping for – especially as the messaging last week was that rates would need to come down faster if the labour market continued to loosen. Indeed, the labour market is a source of contention with the Resolution Foundation suggesting that official figures are misleading and that employment is higher than indicated. I think it looks likely that a December cut is off the cards
Globally, PMIs were generally soft, consistent with sluggish activity. The UK and euro area both fell back below 50, whilst in Japan there was a small rise to 49.8. In the euro area there is a clear divide between German and France on the one hand (weak) and the rest. In the UK, business confidence took a knock and there were indications that the rise in National Insurance will impact employment prospects and that price rises would be attempted to offset the margin squeeze arising from higher labour costs. The US provided a more upbeat message with the composite index rising to 55.3. Within this reading, the manufacturing outlook remains sluggish but service activity more than offset, rising from 55 to 57.
US treasury yields were modestly lower, with the 10-year rate finishing at 4.4%. Gilts closed at a similar level but recorded a bigger yield drop over the week. Euro rates mirrored the move in the UK; German ten year closed below 2.25%, a fall of 10bps. Credit markets were more variable. Sterling spreads widened as weakness was seen in subordinated bank debt. The ongoing motor finance legal dispute is casting a cloud over the bank sector, with Moody’s indicating a possible £30bn liability for compensation payments. Banks get no sympathy but trying to navigate what is acceptable practice is getting increasingly difficult, with the courts and FCA seemingly at odds with each other. High yield markets were generally better with spreads trending lower.
This is a financial promotion and is not investment advice. Past performance is not a guide to future performance. The value of investments and any income from them may go down as well as up and is not guaranteed. Investors may not get back the amount invested. Portfolio characteristics and holdings are subject to change without notice. The views expressed are those of the author at the date of publication unless otherwise indicated, which are subject to change, and is not investment advice.