Europe Heads More Comfortably into Winter Without Russia's Nord Stream Gas

Energy

Summary:

Europe has increased alternative supplies, cut demand. EU energy chief says Russia has lost power over pricing. Analysts say German economy still paying a heavy price.

High levels of gas storage, lower energy prices and new sources of fuel mean Europe is heading into a second winter with scarce Russian gas in a more comfortable position than a year ago.

After decades of relying on Russia to supply cheap gas, resuming that dependency became more unlikely than ever following the unexplained explosions a year ago today that hit the Nord Stream pipelines running under the Baltic Sea from Russia to Germany.

Before Russia's invasion of Ukraine, the Nord Stream 1 pipeline had accounted for 15% of Europe's gas imports in 2021, according to the Oxford Institute for Energy Studies. A second Nord Stream 2 link was planned but never operated.

At the time of the pipeline attack, European gas prices were three times higher than before Russia invaded Ukraine and industries were cutting output to contain gas costs. Europe Heads More Comfortably into Winter Without Russia's Nord Stream Gas_1

Europe Heads More Comfortably into Winter Without Russia's Nord Stream Gas_1

Replacing Russia

Now prices are much lower. European gas benchmark the front month contract on the Dutch Title Transfer Facility is trading at around 40 euros compared with 180 euros a year ago.

Policymakers and industry remain sensitive to price risks as economies are fragile and inflation high, but they say they have addressed Russia's power to add to the problem.

"Our biggest risk was that Russia can manipulate our energy markets," EU Energy Commissioner Kadri Simson told Reuters. "They don't have this leverage any more."

The bloc, she said, has quickly improved its ability to transport alternative supplies.

Before its invasion of Ukraine, Russia sent around 155 billion cubic metres (bcm) of gas to Europe each year, mostly via pipelines, according to EU figures.

In 2022, piped gas imports to the EU dropped to 60 bcm. This year, the EU expects them to fall to 20 bcm.

Coping with the shortfall has required tackling supply and demand.

On the supply side, Norway has replaced Russia as the EU's biggest pipeline gas supplier and liquefied natural gas (LNG) imports have surged, led by supplies from the United States.

New pipelines to carry non-Russian gas opened last year in Greece and Poland. Finland, Germany, Italy and the Netherlands opened LNG import terminals and more are planned in France and Greece. Europe Heads More Comfortably into Winter Without Russia's Nord Stream Gas_2

Europe Heads More Comfortably into Winter Without Russia's Nord Stream Gas_2

Germany, previously Europe's biggest buyer of Russian gas, has been particularly focused on new infrastructure.

It has opened three floating storage and regasification (FSRU) vessels, able to import equivalent to 50%-60% of the 55 bcm/year Nord Stream 1 used to pipe in from Russia, SEB Commodities Analyst Ole Hvalbye said.

To shore up supplies, the EU began jointly buying non-Russian gas.

It also introduced back-up rules requiring countries to share gas with their neighbours in a crisis and agreed legal obligations for countries to fill gas storage, typically commercial sites used by companies to deal with seasonal variations in consumption.

Across the EU, gas storage caverns are now 95% full, Gas Infrastructure Europe data show. When completely full, they should cover about one third of the EU's winter gas demand. Europe Heads More Comfortably into Winter Without Russia's Nord Stream Gas_3

Europe Heads More Comfortably into Winter Without Russia's Nord Stream Gas_3

Industry Hit

A big factor in avoiding energy shortages has been the plunge in demand caused by high prices, although EU and government policies also promoted energy saving.

The weather played a part as a warm winter made it relatively easy to use less energy for heating and Europe emerged early this year from its peak season for gas demand with unusually full storage caverns, making it easier to replenish them this year.

Apart from uncertainties about this winter's weather, some analysts say the price of reduced energy use could be a permanent contraction of the bloc's industrial activity.

Europe's biggest economy Germany is expected to shrink this quarter as industry is in recession, according to the country's central bank.

Energy Aspects estimates 8% of the 2017-21 average industrial gas demand in Belgium, Britain, France, Germany, Italy, Portugal, the Netherlands and Spain may be gone for good by 2024.

"Europe has managed to swap out the [Russian] volumes. But in reality, this has only been possible at the expense of wider economic activity," Tom Marzec-Manser, head of gas analytics at ICIS, said.

Some of the reduction in gas demand has been driven by a more positive transition as Europe has increased its reliance on renewable energy.

Europe is expected to install 56 gigawatts (GW) of new renewable energy capacity in 2023 - enough to replace around 18 bcm of gas this year, Wood Mackenzie said. Europe Heads More Comfortably into Winter Without Russia's Nord Stream Gas_4

Europe Heads More Comfortably into Winter Without Russia's Nord Stream Gas_4

Tight Gas Supplies

Turning to the coming winter months, Gergely Molnar, gas analyst at the Paris-based International Energy Agency, said Europe was in "a quite comfortable place".

Analysts said a return to the record high prices seen last year - which peaked at 343 euros/MWh in August 2022 - is unlikely.

But globally, gas markets are unusually tight - posing the risk that Europe could face price spikes depending on exceptional weather or any further supply shocks, such as Russia cutting off the remaining pipeline gas and LNG it still supplies to Europe.

Any such spike would increase pressure on politicians when the EU, Britain, Poland and the Netherlands face elections in the next year in which the cost-of-living crisis is expected to be a dominant issue.

They could find themselves again trying to find funds to help with energy bills and incentivise more filling of storage whose cost is believed to have been many billions.

"You are talking about a much lower cost than in summer 2022. But that could still cost billions of euros," Jacob Mandel, Senior Associate at Aurora Energy Research said.

Source: MarketScreener

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Alex

Economic

Uruguay's devastating drought was at its peak when President Luis Lacalle Pou took an unexpected question from a young student during a visit to a primary school in the capital: "Why is the water so salty?"

"We have to wait for the rain," Lacalle Pou replied. "We must save our water only for essential needs."

Recent rainfall has eased the parched conditions that prompted the government to mix water supplies with a brackish source in parts of Montevideo, and the capital's depleted reservoirs have started to recover.

But many Uruguayans unable to afford bottled water say the government has prioritized industrial uses during this year's drought, stirring anger over plans by Google to build a data center using millions of liters every day to cool its servers.

"These companies consume vast volumes of water, which are, in turn, our reserves," said Daniel Pena, a sociologist and researcher at the Republic University in Montevideo.

"Now, with the drought, it's as if someone emptied your bank account. Your savings just aren't there anymore," said Pena, who has campaigned against growing use of potable water by industry as a member of the Coordination for Water civil group.

Alphabet-owned Google has acquired land in the western department of Canelones to build its second data center in Latin America. In 2015, it opened its first in the region in a suburb of Chile's capital, Santiago, announcing three years later that it would triple its size to meet growing demand.

The company's plans to build a second project in Chile - which has been gripped by drought for more than a decade - have faced delays since 2020 as local communities filed environmental complaints.

Squandered water supplies?

According to Google's sustainability data, the company's more than 20 data centers consumed approximately 5.22 billion gallons (19.8 billion liters) of water in 2022, or more than 14 million gallons (53 million liters) per day.

That is equivalent to the domestic water consumption of nearly 175,000 people in the United States, as per the latest estimates from the U.S. Environmental Protection Agency.

It is still much less than other industries, such as Uruguay's key pulp and paper sector, but it poses a further strain on increasingly limited water supplies as climate change increases the frequency and severity of droughts.

Surging internet use in recent years has accelerated demand for new data centers around the world, increasing competition for land and raising concerns about the use of resources - including water.

Data center growth is underpinned by how the pandemic supercharged online and especially video activity, triggering a surge in Zoom calls, photo-sharing and social media use. Novel technologies such as artificial intelligence and autonomous driving could spur further expansion.

Google's planned data center in Canelones would power user requests for its array of internet services, such as YouTube, Gmail and Search.

Initial plans for the facility envisaged daily water use of 7.6 million liters (about 2 million gallons), according to information obtained by Pena following a freedom of information request last year.

That is equivalent to the daily water consumption of 55,000 people in Montevideo, a city of 1.4 million people. Most of the water used in cooling evaporates, meaning it can not be retained for other uses.

Running a soup kitchen that offers meals to children in the poor Nuevo Comienzo neighborhood just outside the capital, Fabiana Molina, 50, said she feared the poor would bear the brunt of growing competition for limited water resources.

"The 7.6 million liters that Google will use are 7.6 million squandered," she said.

Uruguay's industry ministry said the original project had been withdrawn by the company, and that it was now working with an alternative plan that would use less energy and water.

A Google official told the Thomson Reuters Foundation the project is still in the "exploratory phase" and must undergo environmental approval, for which final figures may differ from initial estimates.

Global Pushback

The pushback against Google's plans in Uruguay comes amid growing opposition to data centers around the world - from Europe to the United States and elsewhere in Latin America.

In Chile, local residents and authorities filed a formal complaint against Google's second planned data center at the country's environmental court in 2020, prompting Google to commit to adopting alternative cooling methods. But the project remains on hold.

A data center project planned by Microsoft in Quilicura, close to Google's existing Chilean facility, has encountered similar opposition, delaying the approvals process amid concerns from the local community about its potential impact on an ecosystem already suffering from dry weather.

The project, however, is moving forward as the U.S. company undergoes the environmental permitting process. An additional amendment, in which Microsoft committed not to draw water from nearby sources, led to approval from most local public bodies.

Tech companies highlight the positive economic impact of data centers. Google said its Chilean data center required a $290-million investment and helped boost gross domestic product (GDP).

When Google announced in 2018 it would invest an additional $140 million to expand it, then President Sebastian Pinera hailed it as showing Chile was part of the "fourth industrial revolution".

But critics say data centers create few jobs and give little back in exchange for the resources they use, compounding public anger as water scarcity impacts daily life.

At her home in El Tobogan, a slum area on the outskirts of Montevideo, pensioner Lita Leite said she had to use salty water to prepare her mate, a traditional infused herbal drink drank widely in parts of South America.

"It was extremely foul-tasting ... (but) for me, it was impossible to afford bottled water daily," said Leite, 67, accusing Lacalle Pou's conservative government of having "handed over control of our natural water."

"Big companies take millions of liters of water yearly, but it seems like us Uruguayans have lost our rights," she said.

($1 = 38.1500 Uruguayan pesos)

Source: Reuters

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Justin

Forex

Central Bank

Economic

Dollar goes on a rampage

The US dollar rally has gone into overdrive lately. Empowered by a stunning rise in US yields, solid economic fundamentals, and safe haven flows, the dollar has charged higher to record 11 consecutive weeks of gains against the euro.

In a nutshell, the United States appears much more resilient than any other region. Incoming data releases continue to reaffirm the strength of the US economy, while in contrast, Europe is suffering a sharp slowdown in economic growth and China is still dealing with the implosion of its property sector.

This differential in economic growth is increasingly pushing investors towards the United States, and the impressive rally in US yields lately has made the dollar even more attractive from an interest rate perspective.

Week Ahead – Dollar Shines ahead of Nonfarm Payrolls_1

Hence, the dollar offers the ‘full package’ at the moment – the highest real rates among the major economies, the strongest economic growth, and safe haven qualities thanks to its reserve currency status. Meanwhile, there’s a lack of attractive alternatives in the FX arena, as every other major currency is dealing with its own problems.

Next week’s data releases will either add more fuel to this rally or trigger a correction, with the main event being the US employment report on Friday. Forecasts suggest nonfarm payrolls rose by 150k in September, less than the previous month but still a decent number overall.

Meanwhile, the unemployment rate is projected to have ticked back down to 3.7%, while wage growth is expected to have picked up some steam in monthly terms. If the forecasts are met, this would be yet another dataset reinforcing the Fed’s message that interest rates could remain higher for longer.

As for any surprises, most early indicators point to another solid month for the US labor market. Applications for unemployment benefits fell sharply in September, so there were no signs of any mass worker layoffs. Similarly, business surveys from S&P Global signaled a reacceleration in employment growth.

Week Ahead – Dollar Shines ahead of Nonfarm Payrolls_2

Speaking of business surveys, the ISM manufacturing index is due on Monday, ahead of the non-manufacturing PMI on Wednesday. In the political scene, the government will shut down this weekend unless a funding deal is reached in Congress. That said, markets usually ignore these shutdowns, as investors view them as political theater. For markets to care, it would need to be a prolonged shutdown that dampens economic growth.

RBA and RBNZ decisions

Crossing into Australia, the Reserve Bank will conclude its meeting early on Tuesday, the first one under the new Governor, Michelle Bullock. Even though data releases have been rather strong lately, with the labor market enjoying a substantial recovery in August and inflation reaccelerating, markets assign less than a 10% probability to a rate increase.

That’s mostly because the latest signals from the central bank itself show a preference for keeping rates unchanged. The latest RBA minutes preached patience, as rates have already risen quickly and the full impact of all this tightening has not been felt yet.

Week Ahead – Dollar Shines ahead of Nonfarm Payrolls_3

A decision to keep rates unchanged would argue for a negative reaction in the Australian dollar, but nothing dramatic, as this is the market’s baseline scenario already.

In neighboring New Zealand, the central bank will announce its own decision on Wednesday. The market-implied probability for a rate increase is also around 10%, but it might still be an exciting event as the economy has outperformed expectations lately. Hence, the question is whether the RBNZ will set the stage for another rate hike in November.

Inflation seems to be gaining momentum again. Even though inflation cooled a little in the second quarter, the jobs market remained very tight, with record levels of labor force participation and an explosion in population growth helping to boost demand. In addition, the depreciation of the New Zealand dollar in recent months coupled with the sharp rise in oil prices will also help to refuel inflation.

Against this backdrop, the RBNZ will likely keep rates unchanged, but perhaps signal that a rate increase in November is a real possibility. Markets assign a 60% chance to that scenario, and if this probability moves any higher in the aftermath, it could lift the currency somewhat.

Week Ahead – Dollar Shines ahead of Nonfarm Payrolls_4

That said, there’s an election in two weeks, so the risk is that the RBNZ does not deliver any clear signals, to avoid interfering. Either way, the general outlook for the kiwi dollar seems grim, even if the currency spikes higher after the RBNZ. The slowdown in global growth and the deterioration in risk sentiment will likely keep a lid on any rallies.

Chinese data releases will be in focus too. China is the largest trading partner of both Australia and New Zealand, so these currencies are very sensitive to developments in China, where the latest business surveys will be released over the weekend.

Elsewhere, Japan’s Tankan business survey for Q3 will hit the markets on Monday, while in Canada, the employment report for September will see the light on Friday.

Source: XM

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Thomas

Economic

Vietnam plans to restart its biggest rare-earths mine next year with a Western-backed project that could rival the world's largest, according to two companies involved, as part of a broader push to dent China's dominance in a sector that helps power advanced technologies.

The move would be a step toward the Southeast Asian country's aim of building up a rare-earths supply chain, including developing its capacity to refine ores into metals used in magnets for electric vehicles, smartphones and wind turbines.

As an initial step, Vietnam's government intends to launch tenders for multiple blocks of its Dong Pao mine before the year's end, said Tessa Kutscher, an executive at Australia's Blackstone Minerals Ltd, which plans to bid for at least one concession. She cited unpublished information from Vietnam's Ministry of Natural Resources and Environment, which did not respond to requests for comment.

The auction's timing could change but the government plans to restart the mine next year, said Luu Anh Tuan, chairman of Vietnam Rare Earth JSC (VTRE), the country's main refiner and Blackstone's partner in the project.

The proposed restart of Dong Pao - whose timeline, scale and degree of foreign financial support have not been reported previously - comes as many nations fret about their vulnerability to supply disruptions due to China's stranglehold on strategic minerals and its disputes with the U.S. and its allies. Beijing this year-imposed export curbs on minor metals used in semiconductors, which an influential Chinese policy adviser warned was "just a start".

Vietnam has the second-largest rare-earth deposits, according to the U.S. Geological Survey. But they have remained largely untapped, with investment discouraged by low prices that are effectively set by China because of its near-monopoly on the global market. Visiting Hanoi this month to upgrade bilateral relations, U.S. President Joe Biden signed an agreement to boost Vietnam's ability to lure investors for its rare-earth reserves.

In interviews with Reuters, 12 industry executives, investors, analysts and foreign officials described plans for Vietnam, including investments they said showed how talk of derisking supply chains to reduce reliance on China is translating into action. Some acknowledged the difficulties of forging a rare-earths hub but said the gambit could make Vietnam a viable player while assuaging strategic worries, even if China remained dominant.

Kutscher said Blackstone's investment in the project would be worth around $100 million if it wins. She added that the company was talking to potential clients, including electric car makers VinFast and Rivian, about possible contracts with set prices that would shield suppliers from fluctuations and guarantee buyers a secure supply chain.

Sealing such deals would address a hurdle faced by developers in Vietnam. In recent years, Japanese investors Toyota Tsusho and Sojitz abandoned projects at Dong Pao after China ramped up supply, pummelling prices. The Japanese firms did not respond to requests for comment.

Yet despite the focus on derisking, it is unclear whether clients would be ready to pay a premium for Vietnam, said Dylan Kelly, of investment firm Terra Capital, noting the market in general was opaque.

Asked about VinFast's potential involvement, a spokesperson for parent company Vingroup said the group's entity in charge of raw-material procurement, VinES, had no current plans with Blackstone involving rare earths. He did not address subsequent questions about VinFast specifically.

Rivian did not reply to a request for comment.

Rivalling Mountain Pass

Effective exploitation of Dong Pao - which has sat dormant for at least seven years, according to an official at state-controlled miner Lavreco, which owns a concession - would propel Vietnam into the top league of rare-earths producers.

But refining rare earths is complex, and China controls many processing technologies. Dong Pao's estimated deposits also need to be reassessed with modern methods, according to Blackstone.

Inside Vietnam's Plans to Dent China's Rare Earths Dominance_1

Still, rare earths at Dong Pao are relatively easy to access and are mostly concentrated in bastnaesite ores, according to the Hanoi University of Mining and Geology.

These are typically rich in cerium, used in flat screens, and lanthanides, such as praseodymium and neodymium, which go into magnets.

Tuan said VTRE hoped to win a concession that would allow it to extract about 10,000 metric tons of rare-earth oxide (REO) equivalent a year, roughly one-third of the mine's expected annual output. Production could start around the end of 2024, he said.

That would put Dong Pao's output slightly below that of California's Mountain Pass, one of the world's largest mines, which produced 43,000 metric tons of REO equivalent in 2022, according to the USGS.

Vietnam also plans to develop additional mines. In July, Hanoi set a target to produce up to 60,000 tons of REO equivalent a year by 2030. China set a domestic quota of 210,000 tons last year.

Those goals would see Vietnam producing 5% to 15% of China's projected output by the decade's end, said David Merriman, a research analyst at consultancy Project Blue, who expects China to increase production over that period.

Vietnam's targets were "ambitious, though they are not entirely out of the question", he said.

U.S. Encouragement

The U.S. agreed during Biden's visit to help Vietnam better map its rare-earths resources and "attract quality investment", according to a White House fact sheet, a move that could encourage U.S. investors to bid for Vietnam's new concessions.

Reuters could not determine whether concrete plans involving U.S. investors exist at this stage. Officials at the U.S. embassy in Hanoi, the White House and Department of Commerce did not reply to requests for comment.

But recent U.S. attempts to gain a foothold in the Vietnamese industry did not succeed, said John Rockhold, a consultant to the rare-earths sector and president of the Hanoi chapter of the U.S. Chamber of Commerce, adding that one such plan involving VTRE collapsed this year.

That plan would have involved the shipment to the U.S. of rare earths refined by VTRE and possible future investment in Vietnam of $200 million, according to a non-public report for unspecified U.S. investors seen by Reuters.

VTRE confirmed the shipment deal had foundered.

Instead, VTRE in April announced a deal to supply 100 metric tons of rare-earth oxides this year to Australian Strategic Materials. ASM declined to comment on Dong Pao's exploitation.

Blackstone, which is a partner in that deal, operates a nickel mine in Vietnam and has determined that its processing facility in the country could handle ore from Dong Pao, according to a company statement.

From Ore to Magnet

Ultimately, VTRE plans to play a role in the whole rare-earth industry from ore extraction to the final products, said Tuan, who with his wife owns most VTRE shares, according to a list of shareholders he showed to Reuters. Blackstone said the ownership information accorded with its assessment following due diligence.

This is not an easy feat. The U.S. currently exports its rare-earth ores to China for processing as it lacks its own facilities. Inside Vietnam's Plans to Dent China's Rare Earths Dominance_2

Inside Vietnam's Plans to Dent China's Rare Earths Dominance_2

An existing VTRE factory in northern Vietnam specialises in separating rare-earth oxides from the extracted ore. The plant has capacity to process 5,000 tons of REO a year but the company plans to treble that to accommodate input from Dong Pao, Tuan said.

Once separated, oxides are turned into metals for use in magnets and other industrial applications. The metallization process is controlled by China, which produces 90% of rare-earth metals, according to the U.S. Department of Energy.

But VTRE is running a pilot project to build a metallization factory with South Korea's Setopia, said Setopia, which has no previous experience in the sector.

The initial combined investment would be around $4 million, mostly from Setopia, a Setopia official told Reuters, with a plant possibly ready next year.

In the downstream industry, South Korean and Chinese magnet firms are set to open factories in Vietnam, Reuters reported in August.

Dudley Kingsnorth, a professor at the Western Australian School of Mines at Curtin University, said Vietnam had some way to go, including in improving environmental practices, to realise its rare-earth goals.

Still, he said, Vietnam "has the resources, the mining and processing expertise to provide alternatives to China".

Source: Yahoo

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Kevin Du

Economic

Energy

United States thermal coal exports hit their highest levels since 2018 during the first eight months of 2023, climbing 20% from the same period in 2022 thanks to strong demand from key consumers including China, India and South Korea.

Total U.S. exports of coal used for power generation hit 22.5 million tonnes through August, up from 18.3 million in the same period in 2022, according to ship tracking data from Kpler.

In percentage terms, the increase in U.S. exports was the largest among all major thermal coal exporters, surpassing even the 15.7% expansion seen from top coal exporter Indonesia.

U.S. Thermal Coal Exports Jump to 5-Year Highs on Asian Demand_1

The strong gains in U.S. coal exports contrast with the declines seen in domestic coal use for power generation, with U.S. coal-fired power production down over 50% since 2010 as part of efforts to reduce national fossil-fuel emissions.

The diverging trends in coal use and exports leave the United States vulnerable to accusations that it contributes to harmful global emissions trends by sustaining high exports of coal even as it reduces coal consumption at home.

But the strong exports pace also highlights the enduring demand for U.S. coal even as domestic power producers steadily reduce coal's share of the power generation mix.

Top Markets

Asia accounted for 48% of total U.S. exports, or around 10.6 million tonnes, with 7 million tonnes going to India, 1.3 million tonnes to Japan, 1.1 million tonnes to China and 600,000 tonnes to South Korea.

U.S. Thermal Coal Exports Jump to 5-Year Highs on Asian Demand_2

Europe accounted for 26.6% of U.S. exports, with the Netherlands the second-largest buyer overall with 3.2 million tonnes of imports. Germany, Spain and Poland were other notable European buyers, bringing in 1 million, 712,000 and 217,000 tonnes, respectively.

Elsewhere, Egypt (1.9 million tonnes), Morocco (1.0 million tonnes) and the Dominican Republic (662,000 tonnes) were other large buyers, underscoring a wide geographic span of markets for U.S. coal so far in 2023.

Pollution Impact

While China and India, the world's two largest coal consumers, secure a majority of their coal needs from domestic production, imported coal contributes to total emissions from power plants.

In 2022, those two countries accounted for just over 70% of total global power emissions from coal use, discharging over 5.4 billion tonnes of carbon dioxide and equivalent gases, data from think tank Ember shows.

Japan, South Korea, the Philippines, Germany and Poland accounted for a further 8%. U.S. Thermal Coal Exports Jump to 5-Year Highs on Asian Demand_3

Over the near term, the wide range of coal importing markets bodes well for U.S. coal exporters, and outbound shipments should climb again over the winter months as long as U.S. prices remain competitive to other suppliers.

But over the longer term, U.S. coal exporters may start to struggle to profitably find willing buyers for their production, as a growing number of power generation companies have pledged to boost renewable energy supplies and will cut back on coal imports.

In addition, some major coal producers, including China, may increase coal exports over time even as power producers there follow the U.S. lead and reduce coal use in their own generation mixes.

That may lead to greater competition with the U.S. for coal export market share, and lead to steady declines in U.S. export potential over time.

Source: ET EnergyWorld

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Justin

Economic

Central Bank

The US personal income and spending report contains lots of numbers, but the August 0.1% month-on-month core PCE deflator print catches the eye. The consensus was 0.2% and we had been fearing a 0.3% outcome given what we saw from core CPI. There are quite a lot of revisions, but now we have three consecutive 0.2% or 0.1% MoM prints for what is the Fed's favoured measure of inflation. That should argue against the need for a fourth quarter rate hike, especially if we aren't going to get much data over the next month due to the strong likelihood of a government shutdown.

The year-on-year rate remains elevated at 3.9%, but we are hopeful of ongoing declines over the next few months given we have 0.5% MoM and 0.4% MoM readings from September and October 2022 dropping out of the annual comparison. The three-month annualised rates are already getting close to the Fed's 2% target and assuming we see 0.2% MoM prints for the rest of the year we would have annual core inflation near to 3% YoY by year-end, which should calm some of the fears of the hawks on the Fed.

US core personal consumer expenditure deflator (% change)

US Inflation Slows, but Higher Savings Mean a Resilient Consumer_1

Huge revisions to income and spending mean households have more residual savings than thought

Meanwhile household incomes rose 0.4% MoM and spending increased 0.4%, but for GDP growth we are interested in the real, inflation-adjusted numbers. This had real spending increase 0.1% MoM after a 0.6% gain in July, meaning we are on track for real consumer spending growth of around 3.7% annualised in the third quarter, which would help to get GDP growth of around 3.5%.

There were significant revisions to the history though with incomes revised higher and consumer spending revised lower. This is important as it suggests that the household sector accrued more savings during the pandemic and have run down less than previously thought. These aren’t insignificant numbers either. We are talking upwards of $700bn of pandemic-era accrued savings being available to households over and above what we previously thought, which could keep consumer spending more resilient than we had been thinking.

Stock of excess savings accrued since the pandemic ($bn)

US Inflation Slows, but Higher Savings Mean a Resilient Consumer_2

No fourth quarter hike, but interest rates could indeed be higher for longer

The proviso is we don’t have a breakdown on who has these savings and the assumption has to be that many low-income households have already burnt through most of them. This was an assertion made within the Federal Reserve’s Beige book which stated that “some Districts highlighted reports suggesting consumers may have exhausted their savings and are relying more on borrowing to support spending”.

The challenges being faced by the household sector are growing, be it from low real income growth, difficulty obtaining credit, rising gasoline prices eroding spending power, student loan repayments restarting and strike/government shutdowns hitting paychecks. But if there are residual savings out there then consumer spending could end up being more resilient, which would justify the market’s belief in Federal Reserve monetary policy staying tighter for longer.

Source: ING

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Devin

Economic

Britain, which was quick to set ambitious climate goals, is now stumbling on the path to reach net zero emissions by 2050 and facing hurdles that could resonate with nations trying to balance their targets with politics and the cost of action.

After setting world-leading CO2-cutting targets into law in 2019, Britain has struggled to get on track to make them happen. Electric vehicle charging points are being installed slower than targeted, and despite early success in rolling out offshore wind, the government’s latest renewable energy auction awarded zero contracts to wind developers.

Analysts and politicians say that the British government’s move last week to delay targets for green vehicles and heating systems ahead of a looming election reflects a crunch point that other countries may face as they attempt to turn far-off climate goals into concrete measures - with costs for companies and consumers as soon as this decade.

"The UK has been one of the real leaders in climate diplomacy and in their own emissions reductions," Ireland’s climate minister Eamon Ryan told Reuters. "As a friend and a neighbour, I’d have to say some of that has been put at risk."

Britain, which hosted the United Nations annual climate conference COP26 in 2021, still leads the G7 when it comes to slashing output of climate-warming gases — reducing emissions by 49% between 1990 and 2022 with cutting down on coal the biggest driver.

But according to the Climate Change Committee’s June 2023 progress report to parliament, to hit mid-way climate targets, Britain must quadruple its annual emissions reductions outside the electricity supply sector by 2030.

The committee, an independent body set up under Britain's climate change law, had already said in 2022 that the country's strategy "will not deliver net zero".

Prime Minister Rishi Sunak said last week he remained committed to the legally binding target of reaching net zero by 2050 but said Britain could afford to make slower progress in getting there because it was "so far ahead of every other country in the world".

He said he was changing the policy because previous governments had moved too quickly to set net zero targets, without securing the support of the public.

Delaying net zero transition investments could prove politically popular, analysts observed, if an election was on the horizon.

But "this framing only works if you think climate policy is a burden", said Bob Ward, a climate policy researcher at the London School of Economics and Political Science, adding that avoiding short-term costs was likely to lead to a greater bill for taxpayers down the road.

Rollback or reality?

Sunak's own Conservatives defended his decision as advocating for consumers facing a cost-of-living crisis.

"It's right we tweak as, at the moment, these green policies and targets hurt those worse off," one conservative lawmaker told Reuters.

Global gas prices rocketed last year following Russia’s invasion of Ukraine. Although they have fallen in recent months, average British household energy bills are expected to remain high in part due to the country’s reliance on gas for home heating.

Charging infrastructure lags behind what is needed for a growing fleet of electric vehicles and a target of some 600,000 heat pump installations by 2028 looks distant due to a lack of skilled engineers, with only 72,000 installed in 2022.

Britain's move comes as climate change policies come under threat from politicians in other European nations – even as countries face mounting costs from intensifying wildfires, deadly heat and floods fuelled by climate change.

With Poland, Slovakia, the Netherlands, and the European Union's Parliament all holding elections in the coming months, analysts said political pushback could intensify as countries consider policies that - unless coupled with more support to incentivise greener choices - would hit citizens' wallets.

"Transport and buildings are going to be our major problem because that's where climate policy becomes visible to people in their daily life," said Simone Tagliapietra, senior fellow at Brussels-based think tank Bruegel.

Governments not on track to deliver their green targets face a choice: either cut back on commitments, or strengthen policies and financing to deliver them. The U.S., with its Inflation Reduction Act, is offering nearly $400 billion in federal funding for clean energy and technologies.

The German government said on Sunday it would put on hold plans to require more stringent building insulation standards to help the building industry - even after passing new energy-saving targets for 2030 last week.

While Sunak’s move rattled investors and companies, some said the prime minister’s announcement was aligned with reality.

"Delaying the ban on the sale of new petrol and diesel cars is disappointing, but reflects the reality that this is where most of the major car manufacturing nations are," said Britain's environmental audit committee chairman Philip Dunne.