Macroeconomic update by François Duhen

Inflationary fears continued to escalate around the world, exacerbated by the energy-related tension that has compounded the existing problems on supply chains. These are major issues for central bankers, the majority of which remain convinced about the transitory nature of inflation and are trying - sometimes unsuccessfully - to provide reassurance against monetary policy being tightened too drastically. Although investors' doubts led to a clear upward acceleration of the main sovereign yields, particularly in Europe, this is not disrupting the performance of equity indices at this stage, as they are well underpinned by encouraging corporate publications that demonstrate their ability to withstand the rise in input costs. Progress regarding negotiations on the US stimulus package is also helping to maintain confidence in the financial markets, although its validation by Congress has been postponed again.

In Europe, investors called into question the ECB's scenario of a temporary inflation spike and are increasingly expecting key rates to be raised as of next year. This is an assumption that Christine Lagarde sought to rule out at the last monetary policy meeting, without succeeding in providing reassurance, particularly due to the lack of visibility on the future of the institution's asset purchase programmes after the end of the special pandemic-related programme (PEPP) scheduled for March. The president's failure to dispel concerns was reflected in the sharp rise in European sovereign yields, particularly those of peripheral countries, thus accentuating a trend that has been underway for several weeks as inflation figures continue to spring an upward surprise. These inflationary pressures are particularly fuelled by the surge in energy prices and in particular those of European gas, against a backdrop of weak supplies from Russia and abnormally low inventory levels. This is already weighing on economic activity, with several plant closures, but also on the margins of companies facing other cost increases. Nevertheless, while one-third of the companies in the Stoxx Europe 600 had published their quarterly results by end-October, most of them are proving resilient for the time being, sending out a positive signal that European indices are returning to their historical highs.

In the US, October began with a last-minute vote to extend federal state funding until early December and avoid a shutdown of non-essential services. Discussions on Joe Biden's stimulus package continued and resulted in a new proposal from the US president. Under pressure from centrists in the Democratic Party, the total amount was again revised down to $1,750bn and the corporate tax hike was shelved, a positive development for US equity markets which are continuing to break all-time records. This additional stimulus should provide further significant support to US growth, which is losing momentum as shown by the publication of Q3 2021 GDP, which came out a notch below expectations, although this mainly reflected a slowdown in activity due to the resurgence of the epidemic over the summer and the persistent tension on supply chains. The latter are fuelling an even greater inflationary risk in the US, and particular attention will be paid to the Fed's meeting on 3 November.

In Asia, energy-related tension has intensified, bringing China's economic growth to a halt. The latter is also penalised by the resurgence of Covid-19 cases, regulatory uncertainties and problems related to Evergrande's debt. On this subject, the Chinese authorities continue to state that they intend to let the group's shareholders and creditors bear the consequences while ensuring that any risk of contagion to the rest of the economy is contained. Note also the resumption of trade talks between China and the US, although with no major breakthroughs at this stage. In Japan, the legislative elections were won by the ruling party (LDP), fuelling hopes of further fiscal stimulus.

With regard to commodities, gas and coal prices have reached new all-time highs, driving oil prices up due to a substitution effect. However, this upward momentum on the energy markets is showing signs of slowing, with prices falling back in recent days after China announced a massive ramping up of coal production and Vladimir Putin stated that Russia would increase its gas exports to Europe. However, crude oil prices remain dependent on OPEC+, which has chosen not to accelerate its production increase, given that the cartel is particularly concerned about the effects of a possible new wave of Covid-19 this winter. October was also a volatile month for industrial metals, which alternated between upward phases related to production tension and downward phases due to concerns over economic growth.

Completed on 3rd november 2021