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Macroeconomic update by François Duhen

Inflation continues to be the main concern for financial markets. However, the latter are increasingly factoring in the risk of a significant slowdown in economic activity in Western countries. Investors are thus fluctuating between fears of overly aggressive monetary tightening to the detriment of growth and hopes of a delay on the part of central banks, which has helped to contain risk aversion. The gradual lifting of health constraints in China has also rekindled optimism that tension on supply chains will improve, thus easing inflationary pressures.

By hitting a historical high of 8.1%, the rapid rise in euro-zone inflation has reinforced the sense of urgency for faster monetary tightening by the ECB. Consequently, Christine Lagarde indicated for the first time that an exit from negative deposit rates by end-Q3 was likely, while some members favoured rate hikes of 50bp. The euro took advantage of this to rally against the dollar (+2%), also supported by the ongoing rise in sovereign yields (+18bp for the French 10-year, +20bp for the German 10-year). The risk of fragmentation in the euro zone is also once again a concern for the financial markets, which is reflected in the continued widening of peripheral spreads (+13bp for the Italian spread), as well as the Itraxx Crossover (+26bp), reflecting some risk aversion on the bond segment. Despite this renewed risk aversion, the main European equity indices managed to end the month at equilibrium (-0.1% for the Stoxx Europe 600, +0.7% for the CAC 40), thanks to the lowering of expectations related to the Fed (see below) but also to the lack of any aggravation of the Ukrainian war. Across the Channel, the situation is hardly more encouraging, with the Bank of England having raised its rates while investors increasingly fear a risk of stagflation (low growth and high inflation), which continues to weigh on pound sterling.

In the US, inflation showed signs of easing, which heightened some investors’ expectations regarding a pause in the Fed’s monetary tightening in September. Yet certain members have tempered these hopes by reiterating that their priority was still to combat inflationary pressure, which remains elevated, as illustrated by the surge in petrol prices, which continue to beat records. US consumers are starting to feel the pinch to their purchasing power, which is reflected in the weakness of confidence indicators, although consumer spending is holding up for now thanks to the use of savings. The impact of inflationary tensions is also reflected in the communication of several retail sector players, who have expressed doubts about their capacity to continue passing on price increases to customers and thus protect margins. This temporarily buffeted US equity markets, but they have since returned to their equilibrium point (-0.6% for the S&P 500 m-o-m) thanks to optimism on the Fed’s strategy. This has also led to a fall in US sovereign yields (respectively -14bp and -20bp for 10-year and 2-year yields) and in the value of the dollar (-1.4%).

In China, easing of the lockdown in Shanghai has largely helped allay fears about Chinese activity, heavily impacted by health constraints until now (the Caixin manufacturing PMI is still in contraction territory). Beijing is also increasing the number of measures to support the economy, notably via the infrastructure sector. This has accelerated the rebound of Chinese equity indices (+4% for the Hang Seng), which outperformed their emerging market peers at the end of the month.

Oil prices headed upwards sharply again on news of a European embargo on Russian oil, although the latter will only be gradual and some countries have been exempted (Hungary). Note also that the price of wheat reached a new all-time high in recent weeks, in the wake of a surge in grain prices in general, against the backdrop of the interruption of Ukrainian exports, although Vladimir Putin has mentioned the possibility of opening certain ports in the Black Sea to facilitate the transit.

Completed on 7th June 2022