Macroeconomic update by François Duhen - 4th trimester 2022

The financial landscape was marked by central bank statements during the last quarter of the year, which was eventful to say the least. These banks slowed their rate hikes, as expected, in view of a peak in inflation very likely to have been exceeded, but their communication remained cautious, insisting on the need to maintain restrictive policy to bring inflation back to the 2% target. In this context, global sovereign yields rose again at the end of the year, albeit without preventing equity indices from rising, buoyed in particular by the reopening of China and its economy.

In the eurozone, the ECB slowed the pace of its monetary tightening from a 75bp increase in key rates in October to +50bp at the last meeting in December, while reaffirming its intention to maintain a permanently restrictive policy in 2023 to curb second-round effects and avoid a price-wage loop. It also announced the long-awaited quantitative tightening (i.e. reducing the size of the balance sheet), although the initial pace will be relatively slow. As a result, European sovereign yields accelerated sharply (+39bp for the German 10-year rate and +32bp for France), also helped by the rise of the euro (+9%) against the dollar. On the other hand, note the fall in UK yields (-39bp) due to the dissipation of political risk after the resignation of Liz Truss. Despite Christine Lagarde’s firm tone, the risk aversion movement was very limited, as shown by the tightening of the iTraxx Crossover (-182bp over the whole quarter) and good equity market performances, with the Stoxx Europe 600 advancing over 10% over the period. The Chinese support factor (see below) and good corporate results at the end of the year were positive catalysts, while European governments are stepping up aid to contain the impact of the energy crisis. The latter largely explains the resilience of European economic activity but also fuels continued inflationary pressures.

In the US, the slowdown in prices was much more pronounced than in Europe, which prompted the Fed chair to adopt a slightly less restrictive tone. This was particularly reflected in the stability of US sovereign yields (+1bp for the 10-year maturity), although equity indices did not outperform their European peers (+7.3% for the S&P 500). Technology companies were still struggling to gain favour with investors, as illustrated by the underperformance of the Nasdaq index (-1%). After months of gains, this quarter also marked the beginning of a downtrend in the dollar against all currencies (global DXY index at -7%).

In China, rising public protests finally led the authorities to ease the health-related constraints and initiate a reopening of the country and its economy. The end of the "zero-Covid" policy was also accompanied by a massive stimulus plan for the economy in order to make the recovery of consumption a priority. While this is currently leading to a sharp uptick in the epidemic in light of an overburdened healthcare system, local indices (Hang Seng up 35% since the November low) have clearly benefitted from the now more favourable medium-term outlook.

China's health problems initially weighed on commodity prices, such as oil (-5% for Brent crude oil at $84/b), but these are already beginning to rebound as investors factor in the positive effects of China's economic recovery over the next few months. Gas prices, meanwhile, have collapsed to levels not seen since the start of the war in Ukraine (below €80/MWh) in the wake of sustained LNG supplies and particularly mild weather conditions.

Completed on 18th january 2023