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Macroeconomic update by François Duhen - 3rd quarter 2022

The third quarter was marked by the acceleration of monetary tightening by central banks, which are determined to focus on their objective to fight inflation and have, through their communication, amplified the very sharp rebound in US and European sovereign yields. In this context, and after a sharp rebound at the beginning of the summer, equity markets have undergone a sharp correction. While inflationary pressures have increased, economic growth has also stalled, notably in Europe due to the inflationary and energy crises. The latter were exacerbated by the halt in gas supplies via Nord Stream 1 during the summer and the surge in its price and that of electricity. In response, European governments increased their support for households and businesses. However, the scale of government spending in the UK desired by Liz Truss fuelled investor fears at the end of the quarter.

In the Euro zone, the acceleration of inflation during the quarter forced the European Central Bank (ECB) to raise its key rates by 50bp in July and 75bp in September, while indicating there would be further hikes at future meetings. This fuelled the sharp rebound in sovereign yields and the plunge in equity indices (-5% for the Stoxx Europe 600 but -13% since the mid-August peak), despite the fact that the economic outlook has deteriorated, as evidenced by the contraction in the PMIs (note, however, the positive surprise of GDP in Q2, due to tourism in particular). The risk of inflation expectations becoming de-anchored is deemed more significant, especially as the halt to Russian gas supplies via Nord Stream 1 has led to a very sharp rise in gas prices and, by extension, those of electricity. This has prompted the European Commission to step up its efforts to reduce price pressures and, above all, to give member states the means to support households and businesses (in particular by taxing the income of certain energy producers). However, some of these initiatives have yet to be approved. At the level of member states, gas stocks have been replenished and substantial fiscal measures taken in order to better protect households and businesses, along similar lines to Germany's announcements. However, the energy issue and the ensuing recession continued to penalise the euro. In addition, prior to the Italian elections, which led to the victory of a right-wing coalition, the ECB intended to reduce the risk of financial fragmentation. In July, it adopted the TPI mechanism enabling it, under certain conditions and as a last resort, to carry out targeted and unlimited debt purchases.

In France, activity benefitted from the rebound in tourism this summer but purchasing power continued to suffer from the acceleration of inflation. The government has stepped up its support, notably via a €45bn aid plan, including the partial extension of the price cap on gas and electricity prices in 2023 (increase limited to +15%).

In the UK, the new Prime Minister Liz Truss announced a vast fiscal plan aimed at limiting the rise in energy bills and reducing taxation. Financed by debt, it caused a surge in sovereign yields and a fall in the pound sterling. Faced with the risk of financial instability, the Bank of England, which had raised its key rates by 50 bp in August and September and announced that it would do more, had to intervene urgently by buying long-term debt to ease the strains on financial markets.

In the US, the risk of a hard landing for growth was initially feared before activity and employment indicators helped allay these concerns. Sovereign yields thus rose sharply, which can also be explained by the action of the Fed (in particular Jerome Powell’s statements in Jackson Hole). The message hammered home was clear: the Fed will continue to raise key rates, making monetary policy more restrictive, and will maintain them at this level in order to calm inflation and anchor expectations (the latest data are reassuring on this point). Faced with inflation that is beginning to show signs of easing (although far too slowly), the Fed has remained "aggressive", having raised its key rate range by 75 bp twice (to 3%-3.25%). In the wake of techs, the S&P500 fell 17% from its peak (and 5% over the quarter). The dollar benefited from this, and was also supported by the resurgence of risk aversion worldwide. In addition, the Biden administration adopted measures to support the economy, albeit on a smaller scale than in 2020.

In China, in addition to renewed geopolitical tensions with Taiwan, activity continued to be affected by health restrictions and, to a lesser extent, the crisis in the property sector, and climate factors. The authorities increased their fiscal and monetary support (the central bank cut its rates moderately on two occasions), but economic activity and confidence remained weakened. Regarding emerging countries, the easing of commodity prices contributed to an easing of inflationary pressures, concomitant with their central banks tightening monetary policy.

In commodities, oil prices fell sharply to below $90/b on fears of a global recession. Gas prices in Europe reached an all-time high in August, above €340/MWh, on the announcement that flows through the Nord Stream 1 pipeline would be halted, before falling back to around €200/MWh. In general, an easing of commodity price indices was observed.

Completed on 6th october 2022