Macroeconomic update by François DUHEN, Chief Economist and Strategist CIC Market Solutions - August 2022

Central bankers hammered home a clear message that they would be focusing their efforts fully on the fight against inflation. This communication amplified the sharp rebound in European and US sovereign rates throughout August, especially as the signals on US growth were reassuring and point to "soft landing". Nevertheless, activity slowed, including in China, particularly in industry, due to energy supply difficulties and factors related to global warming.

In the euro zone, sovereign rates rebounded sharply in August (10-year in France: +70 bp to 2.15%; in Germany: +60 bp to 1.54%) due to more aggressive communication from the European Central Bank (ECB), which appears determined to lift its key rates into restrictive territory. Isabel Schnabel, a member of the ECB's Executive Board, has twice voiced fears that inflation expectations are becoming de-anchored. Keeping expectations anchored is all the more necessary as inflation in the euro zone, particularly energy inflation due to restrictions on gas supply by Russia, continued to accelerate (+9.1% year-on-year in August after +8.9% in July) and the producer price index reached a historic high in Germany (+37.2% year-on-year in July). Although the August PMI indices for the euro zone indicate that activity continues to contract in industry, their change has not reversed the upward movement in rates, while the euro zone continues to be penalised by the loss of household purchasing power. Between rising interest rates and a rapid deterioration in growth prospects, European equity indices fell towards the end of August (-5% for the Stoxx Europe 600 and the CAC 40). The euro continued to depreciate against the dollar (-2% at €1 = $1) even though investors factored back in rapid monetary tightening by the ECB. In the UK, the Bank of England raised its main policy rate by 50 bp to combat inflation, which reached 10.1% year-on-year in August. However, the prospect of a deep recession led to a fall in the pound sterling against the euro (-3% over the month to €1 = £0.864).

In the United States, at the Fed's Jackson Hole symposium, Fed Chairman Jerome Powell stressed the need for further monetary tightening. These remarks, like those of the other members, amplified the upward movement of US sovereign rates (particularly via the real component), which rose substantially by almost 50 bp in August (2-year: 3.45%; 10-year: 3.15%) and also led to a swoon in the equity markets (-4% for the S&P 500 in August). Although inflationary pressures have eased slightly, the ISM activity indices and the July employment survey, published at the beginning of the month, reassured investors that central bankers would continue tightening without imperiling growth. Moreover, measures to support the economy were adopted this month ($430bn stimulus plan over 10 years), although the impact on growth and inflation will remain very limited.

In China, in addition to the renewed geopolitical tensions with Taiwan, economic activity is struggling to rebound owing to health restrictions and, to a lesser extent, the real estate crisis and climate factors (drought in various regions causing electricity rationing), as shown by the publication of official PMI indices for July, which were down in industry. In response to these concerns, the authorities have announced new stimulus measures representing nearly $150 billion in spending, and the central bank has lowered its key rates twice, but this response has not yet boosted confidence and growth. Over the month, the Hang Seng index continued to underperform the emerging market equity indices (almost stable vs -1% for the Hang Seng).

Finally, a key development in August was the surge of gas prices, which reached an all-time high (+69% to €339/MWh) due to the suspension of the Nord Stream 1 pipeline by Moscow, before falling back to around €240/MWh (+20% over the month) after favourable news regarding the achievement of the gas stockpiling target in Europe. Oil prices were also volatile (with Brent fluctuating between $92 and $105/barrel) against the backdrop of a slowing global economy and the announcement of an OPEC production cut.

Completed on 31st august 2022