Macroeconomic update by François Duhen - October 2022

The month of October was marked by ongoing monetary tightening by the European Central Bank (ECB) in order to combat inflation, which continues to accelerate and increasingly penalise European economies. However, due to slightly less aggressive communication from central bankers in Europe and the United States, financial investors reduced their expectations in terms of monetary tightening, causing sovereign yields to fall at the end of the month. Moreover, the tension that had affected the British bond market for a while eased following the resignation of PM Liz Truss, and the revision of the budget plan initially announced. Lastly, the National Congress of the Chinese Communist Party strengthened President Xi Jinping's grip on power and confirmed the main thrusts of his policy, notably in terms of health.

In the euro zone, the acceleration of inflation compelled the ECB to raise its key rates by another 75bp at its monetary policy meeting. Although Christine Lagarde reiterated the need to continue raising key rates, she stated that the pace of their increase would also depend on an analysis of the consequences of measures taken so far, at a time when the economic context is already deteriorating rapidly. In addition, in order to reinforce the increasingly restrictive nature of its monetary policy, the ECB retroactively tightened the conditions of the cheap financing TLTROs for banks (€2,100bn) as a way of encouraging them to repay their loans early. Moreover, despite the tourist season, the first GDP estimates indicated a slowdown in activity in Q3 (+0.2% q-o-q) but the PMI indicators are already pointing to a contraction and this trend picked up pace in October (47.3 vs. 48.1 in September, 50 being the contraction threshold). In light of the energy crisis, European member states have once again attempted, at the European Council, to agree on a set of measures aimed at limiting the rise in energy prices. These measures (e.g. joint gas purchases, regulation of wholesale gas prices) were the subject of a roadmap, but the differences of opinion between member states remain considerable.

In France, growth also slowed in Q3 due to stagnant consumption and a contraction in foreign trade. To limit the impact of inflation, the government announced the introduction of a €12bn aid package for companies and local authorities aimed at reducing their energy bills. However, the adoption of these measures is complicated in the National Assembly, given the parliamentary opposition to the 2023 Finance and Social Security Financing bills, which led the government to resort to Article 49.3 of the Constitution to speed up their examination.

In the United Kingdom, faced with the realisation that she would not be able to implement her economic programme and the resulting loss of credibility, Prime Minister Liz Truss resigned and was replaced by Boris Johnson's former Chancellor of the Exchequer, Rishi Sunak, who was nominated by the Conservative Party. Liz Truss’ departure helped restore calm on the bond markets after a fraught period triggered by the announcement of a vast unfunded mini budget, which had forced the Bank of England to intervene (there had been a temporary risk of systemic bankruptcy of British pension funds). Ahead of the presentation of the new budget proposal on 17 November, the Sunak government has already alluded to a sharp reduction in tax cuts and a scaling back of support for households and businesses in light of the energy crisis.

In the US, while the preliminary estimate of Q3 GDP points to a rebound in activity (+2.6% q-o-q), the details of the components flag up an ongoing deterioration in the economic outlook. While September's inflation data stabilised at historically high levels, the debate over the terminal rate (at which the Fed will stop raising key rates) has intensified, with the need to combat inflation and second-round effects linked to tensions on the labour market on the one hand, and the increased risk of triggering a deep recession on the other. 10-year sovereign yields fell slightly from their peak (at 4.3%) while the inversion of the yield curve (10-year – 2-year) continued. Ahead of the meeting in early November, Fed members nevertheless stressed the need for further monetary tightening.

In China, following the National Congress of the Communist Party, the appointment of the new Chinese Central Bureau confirmed President Xi Jinping's desire to tighten his grip on power. In the continuity of the previous five-year term, the outlines of his policy appear to have been strengthened, including on the health front ("zero-Covid" policy not adjusted). Although Chinese growth rebounded in Q3 (+3.9% q-o-q), signs of fragility in the Chinese economy remain substantial given the ramping up of health restrictions (e.g. in Shanghai), weak consumption and global trade (PMI activity indices below 50). In emerging markets, former president Lula was elected in the second round of the presidential elections in Brazil against Jair Bolsonaro, the incumbent president. Lula's narrow lead and lack of a majority in Congress reduce his ability to implement his full economic and fiscal agenda.

Regarding raw materials, oil prices remained volatile, fluctuating between $90 and $95/b due to concerns about falling global demand and OPEC production cuts. Due to abnormally high October temperatures and full European gas stocks, gas prices in Europe collapsed to a four-month low below €100/MWh before rebounding slightly at the end of the month.

Completed on 14th november 2022