UK economy buffeted by supply disruptions

Daniel Richards - MENA Economist
Published Date: 07 October 2021


  • The UK economy continues to be buffeted by energy shortages even as the Prime Minister gave an ebullient speech at the ruling Conservative Party’s conference yesterday. Gas prices soared to record highs with November deliveries rising by 40% before promises by Russian President Vladimir Putin to boost supply to Europe saw them fall back later in the day. Further, car traffic on the UK’s roads has fallen back to May levels amidst an ongoing fuel crisis in data released yesterday. Shortages of materials and staff, meanwhile, saw the construction PMI fall back to 52.6 in September, compared to 55.5 in August, an eight-month low. In Manchester, Boris Johnson pushed his ‘levelling up’ agenda but with little in the way of policy detail, while claiming the present supply disruptions were evidence of a ‘change of direction’ towards a high wage, high skill economy.
  • A temporary reprieve to the US debt ceiling crisis looks to be on the cards, as Senate Republican leader offered a limited-time raising of the ceiling to December yesterday. Members of the Democratic Party have signalled that they are likely to accept the deal, despite White House press secretary Jess Psaki saying that they 'don't need to kick the can.'
  • There was disappointing data out of Germany yesterday, as factory orders in the Eurozone’s largest economy shrank -7.7% m/m in August, a much greater contraction that the consensus projection of -2.2% (although the July growth was revised up from 3.4% to 4.9%). The issue remains one of supply chain disruptions and raw materials shortages, which have weighed on the manufacturing-heavy economy for months now. Autos and auto parts orders shrank -12.0% m/m, with the sector still struggling with the global shortage of semiconductors.
  • Eurozone retail sales also disappointed in August, rising just 0.3% m/m, compared to consensus projections of 0.8%. On an annual basis sales were flat, compared to consensus 0.4%. Meanwhile, the July contraction was revised from -2.3% to a deeper -2.6%. Growth was held back by sales of food, drinks and tobacco which contracted -1.7% m/m. Given that internet sales rose at the same it suggests that pandemic dynamics remain at play.
  • ADP jobs numbers in the US rose by 568,000 in September in data released yesterday, far exceeding the consensus projection of 430,000 and potentially setting up for a robust NFP report to close the week. Leisure and hospitality added 226,000 new jobs, amid speculation that the end of the Covid-19 support packages last month may have led more people to re-enter the workforce.

Today’s Economic Data and Events

  • 10:00 Germany industrial production m/m, August. Forecast: -0.5%
  • 16.30 US initial jobless claims, week to October 2. Forecast: 349,000

Fixed Income

  • The UST curve bull flattened overnight as energy prices cooled somewhat although a positive ADP report toward the end of the day helped to push yields higher. On the 2yr UST, yields added about 1 bps to close the day at 0.2925% while on the 10yr they were largely flat on the close at 1.5206%. Developed bond markets generally showed little movement on the close.
  • An index of USD-denominated emerging market bonds ticked lower overnight as the outlook for inflows grows darker. Yields on 10yr Turkish government bonds rose 12bps overnight to 17.85% while on South African bonds yields were up to 9.9%.
  • The UAE priced its first federal bond, with a three tranche USD 4bn issue. A USD 1bn 10yr priced at t+70bps, a USD 1bn 20yr priced at T+105bps while a USD 2bn 40yr Formosa bond priced at a yield of 3.25%. All tranches priced tighter than earlier indications and the order book was more than USD 22bn.


  • The dollar remained supported overnight even as there was a measure of risk-appetite returning to markets. The DXY index rose 0.3% to 94.266. EURUSD fell almost 0.4% overnight to settle at 1.1556 while the ECB considers a plan to adjust its asset purchases once the PEPP expires in Q1 next year. USDJPY held roughly stable on the close at 111.41 while GBPUSD sank 0.34% to 1.3582.
  • Among commodity currencies the NZD was the standout, dropping 0.7% to settle at 0.6914, although it did pare some even deeper losses earlier in the day. Markets appear to have preempted the move by the RBNZ to raise rates yesterday and likely closed positions in the aftermath. Both AUD and CAD weakened overnight as well.


  • Risk-off sentiment returned yesterday, with losses in Asia in the morning heralding losses elsewhere later in the day. While the Shanghai Composite was still closed, the Hang Seng dropped -0.6% and the Nikkei -1.1%. The major Indian indices also ceded ground, as the Sensex dropped -0.9%.
  • This trend continued in Europe, with weak data out of Germany and rapidly rising energy costs exacerbating the issue. The DAX closed  lower, while the FTSE 100 lost -1.2%.


  • Oil prices fell overnight with Brent down 1.8% to USD 81.08/b and WTI off by 1.9% to USD 77.43/b. In the very near term, there appears to be an easing of the current tightness in energy markets. The EIA reported a 2.3m bbl build in commercial inventories, only its second week of increases since the end of July. Gasoline stocks also built, by 3.3m bbl. Oil production moved higher last week to 11.3m b/d while product supplied continues to grow strongly, up 1.1m b/d last week.
  • In gas markets, Russia’s president Vladimir Putin said that the country could export record volumes of natural gas this year by making use of the Nord Stream 2 pipeline that links Russia and Germany. Gas prices fell overnight across the major benchmarks after an earlier squeeze higher.

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