Macroeconomic update by François Duhen - January 2023

With no major central bank meetings, the month of January saw economic statistics corroborate two key trends that began at the end of last year, namely the resilience of the global economy and confirmation of the deceleration in inflation. While this paved the way for a shift in central bankers' rhetoric on both sides of the Atlantic, investors' optimism about an easing of expectations on both the scale and duration of monetary tightening was primarily reflected in the fall in global sovereign yields and the rise in equity markets. This easing of risk aversion was also reinforced by the first tangible signs of the reopening of the Chinese economy, which is now moving towards a gradual normalisation that could spur global growth, which has supported commodity prices in recent weeks.

In the euro zone, there are many differences among ECB members regarding the continuation of monetary tightening, with the rebound in economic momentum causing some to fear a reacceleration in inflation. Economic activity is in fact holding up better than expected, as illustrated by the PMI indices published this month, which continue to be in expansionary territory and are improving sequentially (composite at 50.2 compared with 49.8 expected and 49.3 in December). This has led to a significant easing in expectations of ECB rate hikes, which is reflected in the fall in European sovereign yields. While the picture is a little less positive for inflation, with the Spanish inflation rate coming in above expectations (+5.8% year-on-year against 4.8% expected), this contrasts with the caution adopted by companies in their communication of Q4-2022 results. These results highlight the erosion of demand and the high level of uncertainty concerning the coming months, which has nevertheless helped to limit the rebound of the equity markets on the Old Continent.

The situation is much more critical in the UK, where activity indicators remain in contraction territory, both in services and in industry. The PMIs thus disappointed (composite at 47.8 vs 49.3 expected), and once again underline the difficulties encountered by the British economy due to an inflation that continues to surprise on the rise (core inflation of +6.5% y-o-y) and thus weighs heavily on household purchasing power. Furthermore, the budgetary policy across the Channel is very different from that of the European Union, marked above all by the return of budgetary austerity in 2023, and in particular the abolition of a large part of the aid to companies despite the explosion of the energy bill.

In the US, the various economic statistics also confirm the ambivalence that can emerge in a world where inflation is decelerating despite a more resilient job market and economy than ever. In particular, GDP growth in Q4-2022 was better than expected (+2.9% q-o-q on an annualised basis compared with +2.6% expected), driven in particular by robust consumption, while inflation confirmed that a peak seems to have been reached at the end of last year (at 5% in January compared with 5.5% in December). This optimism was also reflected in a fall in sovereign rates that was even more marked than in Europe, although particularly pessimistic corporate communications (series of layoffs at the technology giants, slowdown in discretionary consumption, etc.) prevented US equity indices from outperforming their European peers.

In China, the beginning of the year was very uncertain due to the surge in new cases following the reopening of the country and the Chinese economy was increasingly disrupted. However, by the middle of the month, health authorities were confident about the health-related situation, with several regions in the country having passed their peak of infection. In addition, Lunar New Year spending surged (up 12% on last year) and traffic congestion data points to a gradual normalisation of travel. These positive economic indicators and the very high level of household savings have supported not only local equity indices but also raw material prices.

Expectations of a significant rebound in Chinese demand as activity picks up and government support measures multiply have strongly supported raw material prices, particularly copper and aluminium, which have hit new highs over the past several months. However, crude oil prices benefitted only modestly, slowed down by the fact that Russian exports remained at higher levels than expected despite the implementation of Western sanctions. Gas prices continued to fall, against a backdrop of exceptionally mild weather conditions.

Completed on 7th february 2023