Macroeconomic update by François DUHEN, Chief Economist and Strategist CIC Market Solutions - November 2023
Regarding October, the momentum of the US economy buoyed long-term US sovereign yields, while the euro zone faced a less favourable economic backdrop marked by the economic slowdown. As a result, the European Central Bank (ECB) decided not to raise its key rates, after 10 consecutive hikes, which contributed to the fall in European sovereign yields at the end of the month and limited the fall of equity markets, although the euro remained stable against the US dollar. In China, the difficulties experienced by the economy remained prevalent, prompting the government to announce additional fiscal support. Lastly, October was marked by the resurgence of tension in the Middle East between Israel and Hamas, following the Hamas attacks at the beginning of the month. The fact that the war has not spread to neighbouring countries and Iran did not have a marked impact on financial assets, particularly oil prices.
In the euro zone, after 10 consecutive increases in its key rates, the ECB left them unchanged in a unanimous decision that was expected by investors. The ECB now believes that keeping key rates at their current level should help bring inflation back towards its 2% target. During the press conference, Christine Lagarde also referred to the many signs of disinflation underway in the euro zone. However, in keeping with its data-dependent approach, the ECB refused to give any indication of future decisions (forward guidance), and did not rule out the possibility of raising key rates if necessary. After peaking in mid-October, short and long European sovereign yields fell overall over the month. In addition, the absence of discussions on the management of the ECB's balance sheet at the meeting also enabled the spread between peripheral rates to narrow. The ECB noted the slowdown in prices and growth in October. Inflation has slowed, reaching a low point since July 2021 in October (+2.9% y-o-y vs. +4.3% in September), due in particular to base effects linked to the rise in energy prices a year earlier, as did core inflation (at +4.2% y-o-y vs. +4.5% in September). In addition to the deterioration in October's PMIs, which were in contraction territory in both industry and services, growth in the euro zone contracted in the third quarter (-0.1% q-o-q vs. +0.2% in Q2, revised upwards), particularly under the weight of the German economy. Finally, monetary tightening also continues to have an impact on credit momentum in the euro zone, according to the ECB's Bank Lending Survey on lending conditions and demand for bank credit in Q3. The ECB's cautious stance and the progress in the statistics helped limit the decline in equity markets (-4% for the Stoxx Europe 600 and -3% for the S&P 500), which were also penalised by a mixed Q3 2023 reporting season.
In France, economic growth stalled in Q3 after rebounding in Q2 (+0.1% y-o-y vs. +0.6% in Q2, revised upwards), while inflation slowed (+4% y-o-y vs. +4.9% in September). As for activity in October, preliminary PMIs remained in contraction territory. While the PMI services index improved slightly (to 46.1 vs. 44.4 in September), the manufacturing index deteriorated further (to 42.6 vs. 44.2 in September). Finally, the government presented its Finance Bill for 2024, which forecasts a deficit of 4.4% of GDP in 2024 (vs. an estimated 4.9% in 2023), requiring the issuance of €285bn in medium- and long-term debt.
In the United Kingdom, monthly growth figures showed a slight rebound at the end of the summer (+0.1% m-o-m in August vs. -0.6% in July), driven in particular by services. The picture was less favourable for inflation, which showed no sign of slowing in September (at +6.7% y-o-y, as in August), affected by the rise in energy prices and continuing strong wage pressures.
In the United States, buoyed by statistics testifying to the momentum of US growth, long-term sovereign yields continued to rise in October (10-year: +30bp), contributing to a steepening of the yield curve over the month. The 5% threshold was even breached temporarily. US growth accelerated substantially in Q3, to an annualised sequential rate of +4.9% (vs. +2.1% in Q2), or +1.2% q-o-q, on the back of a marked increase in household consumption. At a conference, Fed Chairman Jerome Powell did not rule out the possibility of an additional rate hike at the November monetary policy meeting, given the resilience of the US economy. The latter notably continued to show strong job creation (+336k vs. +170k expected and +227k in August). While PCE inflation remained stable in September (at +3.4% y-o-y, as expected, compared with +3.4%, revised down by 10bp for August), core PCE inflation, excluding energy and food, continued to slow (+3.7% y-o-y, as expected, compared with +3.8%, revised downwards in August). Moreover, after bipartisan adoption of a provisional budget to avoid a government shutdown (i.e. a halt to non-essential government services), Kevin McCarthy was removed from his position as Speaker of the House of Representatives after 208 Democrats and eight "dissident" Republicans from the party's radical fringe passed a motion to vacate. The republican Mike Johnson, an ally of Donald Trump, secured the votes needed to become Speaker, but recent events illustrate that US politics remains highly polarised.
In China, economic growth in Q3 far surpassed estimates (at +1.3% q-o-q vs. +0.5% in Q2) and the 2022 growth figure was revised up (to +3% vs. +3.2% previously), including a sharper rebound in activity at the end of the year. This pace is now compatible with the Chinese authorities’ 5% growth target in 2023. In addition, given the headwinds buffeting the economy, illustrated by the deterioration in the official PMI indices for October and flat y-o-y inflation in September, the government announced an increase in the fiscal deficit projected for 2023 of 3% to 3.8% of GDP, and the additional issuance of $137bn in public debt. This increase in issuance is believed to target once again the struggling construction sector. With respect to emerging markets, in Brazil the central bank again cut its key rates by 50bp to 12.25%, maintaining its downtrend.
On the commodities front, oil prices, which had initially risen on fears of widening tensions in the Middle East and disruptions to oil and gas flows, finally fell back to levels close to $85/barrel on the back of mixed Chinese statistics. Similarly, gas price volatility in Europe temporarily increased, with prices once again exceeding €50/MWh for the first time since last April, but stabilised in the second half of the month. The FAO agricultural price index fell again in September, thanks in particular to lower vegetable oil prices.
Completed on 15th november 2023