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

The resilience of the global economy, coupled with slowing inflation and the more accommodative message from central banks, have been the perfect cocktail to support the risk appetite seen over the past few weeks on financial markets. The shift in China’s health authorities on the ‘zero-Covid’ policy has also nurtured investor optimism. That said, investors remain attuned to the impact of the energy crisis and the evolving geopolitical situation in Ukraine, especially as a new round of sanctions against Russia has just taken effect.

In the euro zone, inflation has slowed for the first time in over a year and is now at 10% for November (versus 10.6% in October). Following the Fed’s communication over the past few weeks, ECB members are starting to take a slightly more prudent tone, citing a slowdown in the pace of the key rate increases. Yet the tightening phase is not over, as a restrictive policy is still necessary to avoid a price-wage spiral and the unanchoring of inflation expectations. Investors homed in on the most accommodative part of this message, which is reflected in the steep fall of sovereign yields over the past month (French 10-year yield: -51 bp to 2.28%) and the rebound of equity markets (Stoxx 600: +8%). The euro has also climbed significantly against the dollar (+5% to €1 = $1.05), mainly thanks to the weakness of the greenback, but also amid optimism about Europe’s ability to avoid the severest energy constraints. Note, however, that after an unusually warm autumn, temperatures have plummeted in recent weeks, sending gas prices higher (+13% to €134/MWh). Electricity prices are also up on the back of the ongoing problems plaguing France’s fleet of nuclear reactors.

Inflation is also falling in the US (for the fourth straight month), with the October figure at 7.7% (versus 8.2% in September), and Jerome Powell has adjusted his message as a result. A slowdown in the pace of the increase in key rates (+50bp vs +75bp previously) is practically assured at the Fed’s next meeting, a factor that has also helped ease sovereign yields (10-year: -56bp to 3.57%) and lift equity markets (S&P 500: +6%). Investors also continue to expect a drop in key rates at end-2023, although the Fed has consistently pushed back against this assumption. The resilience of the US economy supports this scenario, as reflected in the economic indicators published over the past few weeks, which were surprisingly vigorous and helped dispel fears of a recession in the US.

At the same time in China, the mounting public protests against overly stringent health restrictions has prompted the Chinese health authorities to relax these rules and open the door to a gradual withdrawal from the "zero-Covid" strategy. China thus seems to be paving the way for a sustainable reopening of its economy within a few months, although the human risk is very high given the low effectiveness of Chinese vaccines. Hopes of an economic rebound are, nevertheless, driving local equity markets (Hang Seng: +20%), especially as the Chinese authorities have also announced additional measures to support the economy and an easing of regulatory constraints on the real estate sector.

The prospect of a reopening of China fuelled a rally in industrial metals such as copper (+4%) and aluminium (+7%). Brent crude oil temporarily benefitted from this, but the introduction of a maximum price on Russian oil by Europe deemed too generous ($60/b, i.e. about the level at which the latter was already trading) and the status quo decided by the OPEC+ countries at their last meeting ended up weakening crude oil prices (-12%).