Macroeconomic update by François DUHEN, Chief Economist and Strategist CIC Market Solutions - September 2023

September was marked by central bank meetings, some of which sprang surprises, and the continuing rise in sovereign yields on both sides of the Atlantic. While the Fed decided to maintain its key rates at their current levels, financial investors noted the resilience of the US economy, as well as the statements and forecasts of Fed members in favour of further monetary tightening, which contributed to a substantial rise in long-term rates. This was particularly true in the United States, where rates have hit their highest levels since 2007, also fuelling the dollar's appreciation. In the euro zone, the ECB surprised some investors by raising its key rates by 25bp (to 4% for the deposit facility rate and 4.5% for the refinancing rate), and European sovereign yields rose sharply, following in the footsteps of their US counterparts. In China, economic activity improved modestly, buoyed by the support measures taken by the Chinese government over the summer. Lastly, oil prices rose well above the $90/barrel threshold resulting from tension on both demand and supply (extension of OPEC production cuts and reduction in Russian exports).

In the euro zone, the European Central Bank (ECB) raised its key rates by 25bp in September (to 4.5% for the refinancing rate, i.e. the highest level since 2001) in a decision that many investors were not expecting, while accompanying it with a much more cautious tone regarding further monetary tightening. The ECB justified this increase by an inflation trajectory that would remain above its target for many months to come (according to its scenario, the 2% inflation target would not be attained before Q1 2025). According to Christine Lagarde’s statement, there was no consensus within the governing council with regard to this increase. Nonetheless, European sovereign yields continued to rise over the month (German 10-year: +30bp; 2-year: +15bp), buoyed by the aggressive rhetoric of several central bankers who raised the possibility of a further increase in key rates between now and the end of the year. However, preliminary inflation estimates showed that inflation continued to slow in September, despite the rebound in oil prices. Core inflation slowed (+4.5% y-o-y vs. +5.3% in August), as did headline inflation (+4.3% vs. +5.2% in August). In addition, the various activity indicators, such as the PMI for September, which were still in contraction territory, testified to the ongoing slowdown in the economy, particularly in industry. As a result, economic growth in the euro zone has been revised downwards in the third estimate for Q2 2023 (+0.1% sequentially vs. +0.3% in the second estimate and +0.1% in Q1). Note that in Spain, Alberto Núñez Feijóo, the right-wing coalition candidate who was the winner in the July general election, failed to secure a majority in two nomination votes and to form a government.

In France, inflation remained stable in September (at +4.9% y-o-y) despite the rise in energy prices. Business activity continued to deteriorate during the month, as evidenced by the fall in PMI for both services and industry, and in consumer confidence. The government has also presented its budget bill for 2024, which envisages a budget deficit trajectory of around 4.9% of GDP in 2023, 4.4% in 2024 and a return to below 3% in 2027.

In the UK, the Bank of England chose to keep its key rates unchanged at its monetary policy meeting (at 5.25% vs. 5.5% expected by the consensus), a decision not fully factored in by investors, as confirmed by the depreciation of sterling against major currencies after the meeting. Moreover, there was no consensus on this pause among the members (five for holding steady vs. four in favour of a 25bp increase), underlining the uncertainty over the next steps in monetary policy. British inflation slowed modestly in August (+6.7% y-o-y vs. +6.8% in July) due to the rise in energy prices, and core inflation, excluding energy and food, slowed much more sharply than expected (to +6.2% y-o-y vs. +6.8% expected and +6.9% in July). Employment data, however, continue to point to ongoing tensions on the labour market, as do wage trends. Finally, in July, UK GDP contracted (-0.5% m-o-m), a decline that was widespread across all sectors.

In the United States, in a decision widely awaited by investors, the Fed maintained its target range for key rates at 5.25%-5.5%, but the upward revision of its growth forecasts and medium- and long-term key rates reinforced the appreciation of sovereign yields (10-year: +50bp; 2-year: +15bp) and the dollar (+4% against the euro, below the threshold of €1 = $1.06). Unsurprisingly, this movement was mainly driven by real rates, with the 10-year benchmark reaching its highest level since 2009, weighing on risky assets and equity indices in particular (S&P 500: -4.7%; Stoxx 600: -2%). For Fed members, the peak in key rates is still expected by the end of the year, with a final hike (12 of the 19 members are in favour of a final increase). While the institution welcomes the recent easing in inflation and employment, it still considers it necessary to maintain a cautious tone in order to keep financial conditions restrictive. The economy is still showing signs of resilience (with the ISM services index in expansion territory), inflation rebounded in August (+3.7% vs. +3.2% in July), due to the rebound in oil prices, while core inflation, excluding energy and food, continues to slow y-o-y (+4.3% vs. +4.7% in July). Finally, while Congress had not yet passed a budget in the run-up to the closing date of the 2023 fiscal year (30 September), a bipartisan proposal extending the financing of all federal activities until 17 November averted a shutdown.

In China, the economy is still experiencing difficulties, but activity has made progress thanks to measures taken by the authorities during the summer. Retail sales and industrial production bounced back more vigorously than expected in August. The official PMI indices point to economic activity that was a bit more dynamic in September in the non-manufacturing sector (51.7 vs. 51 in August) and in industry, the index for which is back in expansionary territory for the first time since March 2023 (50.2 vs 49.7 in August). The good economic momentum is being driven by major groups, while the outlook for small and medium-sized companies remains more negative, according to the Caixin survey. With respect to emerging markets, the Brazilian central bank cut its key rates by a further 50bp to 12.75%, while indicating that it would not accelerate the pace of rate cuts.

With regard to commodities, oil prices rose well above the $90/barrel threshold on the back of resilient demand, the extension of OPEC production cuts (particularly by Saudi Arabia) and Russia's decision to ban distillate exports, aimed at stabilising its domestic market. Agricultural commodity prices fell back a notch in August, according to the FAO Food Price Index.