Winter is Coming!: Time to Bend the Knee?, Stagflation or Slowflation?
In Europe, the increase in natural gas prices has been caused by a (1) prolonged winter, and (2) lack of LNG cargoes over the summer led to tight supply conditions. This was aggravated by (3) poor domestic production and (4) lower supplies from Russia. In China, power demand has increased 15% but domestic coal supply by 5% due to strong exports. The shortage of coal for power generation led to a surge in natural gas prices as an alternative fuel. The power shortage has expanded to multiple regions in China.
Given Russia’s available capacity (15% of Europe’s peak winter supply), their provision of gas becomes critical to energy stability through the European winter.
China stepped up efforts to resolve the power shortage problem by increasing coal supply and coal imports, and ordered banks to ramp up funding to boost coal output.
Any significant decline in gas and coal prices should ease pressure on a global stagflation narrative and support renewed growth expectations.
This could take several months and the coming Winter is an important unknown variable.
We closely watch longer-term inflation expectations which are rising, but within still ranges for central banks.
If this changes, then there will be a regime change as central banks would have to raise rates faster, later in the cycle.
Stagflation is not our base case scenario, but inflation is set to remain higher for longer.
We believe are in a shorter period of “Slowflation” – slowing growth with rising inflation before inflation peaks In the coming quarters.