Inflation Reduction Act Fuels Opportunities In Clean Energy
Inflation accelerated in China and the UK in July. While the US Consumer Price Index (CPI) cooled from June to July, it’s still 8.5% higher than last year.1 In response, the US Senate just passed the Inflation Reduction Act. Is the bigger takeaway how the act will help support growth in the clean energy industry?
This article was written with contributions from Bartlomiej Szczurek. Bartlomiej is a Research Analyst on the SPDR Americas Research Team.
Small caps and cyclical sectors outperformed last week, as markets moved to a risk-on stance with inflation running cooler than expected.2 US high-yield securities gained 1% as high-yield spreads narrowed by 19 basis points (bps).3
Inflation Accelerates Around the World
China’s inflation accelerated in July to 2.7%, the highest level in two years.4 This has largely been driven by food prices and weak consumer demand, which kept overall price pressures in check. In the UK, CPI inflation is expected to accelerate to 9.8% in July from 9.4% in June.5
After June’s 9.1% advance — the largest in four decades — US CPI cooled a bit, up 8.5% from the year prior.6 The US Producer Price Index (PPI) — a key measure of US producer prices — unexpectedly fell in July by 0.5% on a month-over-month (MoM) basis for the first time in more than two years, largely reflecting a drop in energy costs and a moderation in inflationary pressures.7
More data releases are expected this week:
Activity data will likely show the economy is resilient to withstand a path of rate hikes
Industrial production is expected to show expansion at a solid pace in July
Sentiment on manufacturing will likely show improvement on better supply-chain conditions, as well as robust consumer demand due to suppressed gasoline prices
Oil Demand and an Impending Ban
The energy contract in France spiked to €622, the equivalent of approximately $1,100 for a barrel of oil, as Europe works to replenish stockpiles for winter and Russia cuts supplies ahead of the looming European Union ban on most Russian crude.8 Effects from Putin’s invasion of Ukraine have set Russia’s economy back to 2018 in a single quarter, as GDP declined 4% on an annual basis.9
Largest-Ever Investment in Clean Energy
The US Senate has passed the Inflation Reduction Act, the largest investment in clean energy ever, at $370 billion.10 The act is likely to foster innovation, development, and growth within clean power generation and sustainable infrastructure.
The majority of the package focuses on incentives for adoption of renewable energy in homes, along with the acceleration of US manufacturing of solar panels, wind turbines, batteries, and the construction of clean technology manufacturing plants.11
This significant government spending is intended to help the US keep its commitment to reach a net-zero emissions target by 2050. It seeks to reduce emissions in every sector of the economy, from electricity production, transportation, and industrial manufacturing to buildings and agriculture.
Firms leading the way with innovations in renewable energy generation and clean technologies should be positioned to benefit from this initiative and its investment. The Inflation Reduction Act has allotted four times more for energy efficiency than was included in the 2009 Recovery Act.12
Implementation Idea: SPDR® S&P Kensho Clean Power ETF
The SPDR® S&P Kensho Clean Power ETF (CNRG) seeks to track an index of firms at the forefront of innovation in clean technology for renewable energy (e.g., solar, wind, hydro, geothermal), as well as firms that offer products and services in the same renewable energy markets.
As a result, CNRG may offer investors exposure to companies that could benefit from provisions in the new bill, as the fund is a concentrated basket of 46 firms offering exposure to both clean energy companies and suppliers to the energy transformation ecosystem (see chart).13
Source: Bloomberg Finance, L.P., as of August 11, 2022. Characteristics are as of the date indicated and are subject to change.
CNRG Standard Performance as of June 30, 2022
1 US Bureau of Labor Statistics, as of August 10, 2022. 2 Bloomberg Finance, L.P., August 12, 2022. 3 Bloomberg Finance, L.P., August 12, 2022. 4 Bloomberg Finance, L.P., August 10, 2022. 5 Bloomberg Finance, L.P., August 13, 2022. 6 US Bureau of Labor Statistics, as of August 10, 2022. 7 Bloomberg Finance, L.P., August 11, 2022. 8 Bloomberg Finance, L.P., August 11, 2022. 9 Bloomberg Finance, L.P., August 11, 2022. 10 BBC, as of August 9, 2022. 11 Summary of the Energy Security and Climate Change Investments in the Inflation Reduction Act of 2022. 12 Bloomberg BNEF, as of August 8, 2022. 13 ssga.com, as of August 11, 2022.
‘Net zero’ means that the total greenhouse gas (GHG) emissions being emitted should be lower than or equal to the total GHG emissions being removed or absorbed. On a net basis, no additional emissions should be released into the Earth’s atmosphere.
Scientific models that target a temperature rise of less than 1.5°C over and above pre-industrial levels show that we need to achieve net-zero emissions by the year 2050.
In October 2016, the European Union formally ratified the Paris Agreement, which aims to strengthen the response to climate change, among other means by making investment flows consistent with a pathway towards low GHG emissions and climate-resilient development. To comply with the Paris Agreement goals, countries need to achieve net zero emissions by 2050.
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