European gas prices, not oil, drive inflation and bond yields
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European natural gas prices have hit a five-month high as Europe competes with Asia for LNG supply ahead of winter. Bond yields in the UK and Germany have surged to multi-decade highs on inflation fears. The ECB is expected to raise rates again in September despite storage levels at a near two-decade low of 63%.
Key Facts
- European benchmark natural gas prices reached a five-month high in recent days.
- Gas storage levels in Europe are about 63% full, the lowest for this time of year in nearly two decades.
- Yields on key UK and German bonds have surged to multi-decade highs.
- The ECB raised key interest rates in June for the first time since 2023 and is expected to hike again in September.
Gas Price Surge
European benchmark natural gas prices have hit a five-month high in recent days. Europe is scrambling for LNG supply to fill gas storage sites ahead of the winter. Since the Middle East crisis began, Europe has started losing the competition with Asia for spot LNG supply amid spiking prices in the absence of most Qatari LNG term volumes. The Iran war and the intensified competition from Asia came just as Europe is trying to build natural gas inventories for the next winter.
Inflation and Bond Markets
The spiking gas prices threaten to raise inflation further and prompt interest rate hikes beyond current expectations. In the European bond markets, yields on key UK and German bonds have surged to multi-decade highs amid fears of stubborn inflation due to the spike in natural gas prices. Jamie Searle, European rates strategist at Citigroup, said natural gas prices have taken over as the key driver of yields. Emma Moriarty, portfolio manager at CG Asset Management, said the natural gas price is more relevant to the UK and Europe and never really recovered in any of the ceasefires and continues to leg higher.
Monetary Policy Outlook
Higher energy prices boosted inflation in both the UK and the Eurozone, with July prices accelerating from the previous month and jumping from a year earlier. The European Central Bank, which in June raised key interest rates for the euro area for the first time since 2023, is overwhelmingly expected to announce another hike in September. The ECB is expected to stop the rate increases after the September hike.
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European gas prices, not oil, drive inflation and bond yields
