Hot Summers, Cold Winters

“Apocalyptic.”

That’s how one popular strategist described the latest PPI print out of Germany, the load-bearing wall in the West’s economic standoff with Vladimir Putin. (Ukraine is obviously the load-bearing wall in the military conflict.)

On Friday, Germany’s federal statistics office cited “sharp rises in natural gas and electricity prices” for a 37.2% YoY rise in factory-gate prices in July (figure below). It was the hottest reading in history, and exceeded forecasts by a wide margin.

Consensus expected 31.8%, which would’ve represented a second consecutive decline on the 12-month readings. Instead, the market was “treated” to a new record high. On a MoM basis, PPI rose 5.3%, a harrowing upside surprise (economists expected just a 0.7% increase).

Energy prices rose almost 15% from June, and 105% from July 2021. The accompanying color was a testament to Germany’s wartime predicament. “Mainly responsible for the rise of energy prices were the strong price increases of natural gas distribution and electricity,” the release noted. Natural gas and electricity prices rose 164% and 125%, respectively, compared to July of last year.

Notably, power plants were compelled to pay 235% more for natural gas than they did a year ago. Industrial consumers experienced a 195% increase, resellers a 187% jump. Across customer groups, prices rose almost 19% on a MoM basis.

Power prices hit records across Europe this week. Year-ahead electricity prices in Germany are up sixfold from last summer and have doubled over the last 60 days. Day-ahead prices hit records too, and not just in Germany. The UK is experiencing an acute crunch. A GfK poll of UK consumer confidence hit -44 in August, the worst reading in the history of the survey, which dates to 1974. Data out this week showed consumer prices rose double-digits in July, and the BoE expects inflation to exceed 13% in the third quarter as energy prices surge.

You can pretty much just pick a chart — any chart. Or, if you like, you can employ a stack of them, as Nomura’s Charlie McElligott did this week (figures below). Note the title in the upper-right corner. This is indeed a “hot mess.” Unfortunately, it’s likely to become a cold mess in the months ahead. The “still disastrous European / UK Energy dynamic is running in the background, as we begin to transition from summer high-heat drought into the long winter,” McElligott wrote.

“The crisis of confidence will only worsen with the darkening days of autumn and the colder months of winter,” Joe Staton, client strategy director at GfK, said, referencing the above-mentioned record low in UK consumer confidence.

Germany spent the months since Putin’s invasion of Ukraine frantically attempting to secure adequate gas supplies for the winter, an effort complicated by curbed flows through the Nord Stream. German inflation is the highest in modern history and Putin succeeded in rendering Uniper insolvent. The energy giant received a government bailout last month after burning through cash procuring missing Russian volumes in the spot market, where prices have been stratospheric.

Part of the Uniper deal entailed the introduction of a mechanism that allows gas importers to pass along the cost of replacement volumes to end users. Earlier this week, Trading Hub Europe announced a new levy on consumers to help pay for the higher cost of energy provision. German Economy Minister Robert Habeck called the temporary tax, which goes into effect in October, “a consequence of Putin’s illegal war of aggression against Ukraine and the artificial energy shortage caused by Russia.” The levy will run through April of 2024 at an estimated average cost of €290 per year for a family of four.

Insult to injury for beleaguered Germans: An experiment with super-discounted rail passes, which made travel by train, tram or bus effectively free over the summer, ends this month.