Central banks and markets have no rest

  • Markets are forced monetary tightening in the United States, slowing very moderate inflation, wars and sanctions in Ukraine and the consequences in terms of raw material prices, as well as health conditions in China. Unfortunately, these difficult situations are expected to continue in the short term.
  • Europe’s energy prices are still very high, fearing that Russian authorities will stop selling gas to countries other than Poland and Bulgaria and talk between EU countries to impose an embargo on Russian oil by the end of the year. ..
  • China’s PMI fell more than expected in April, reaching its second historic low since February 2020 (46.0pt in compound indicators), confirming a sharp reduction in activity by Covid. The outlook remains negative in the short term as Shanghai is still regulated and has spread to Beijing. That said, the Politburo (China’s highest governing body) has announced more aggressive policies that will maintain economic goals, limit systemic risk, and allow a significant re-acceleration of the economy once it recovers. did. The epidemic has been suppressed.
  • Eurozone GDP growth slowed in the first quarter, but remained positive (+ 0.2%), as expected. At the same time, inflation in April remains very high (7.5%), despite the small bullish base effect on energy. Core inflation (that is, excluding energy and food) is 3.5% higher than expected. This indicates that inflation could persist and the ECB could raise interest rates as early as July (as opposed to September in the central scenario).
  • In the United States, the Fed needs to continue compulsory monetary tightening, despite the shrinking GDP in the first quarter and perhaps signs of peak inflation in the first quarter. Indeed, domestic demand remains strong and the underlying consumer price index (the Fed’s recommended inflation index) remains very high at 5.2%. Finally, labor costs could accelerate further to 4.5% year-on-year in the first quarter, reaching record highs for more than 20 years, raising the risk of a price-wage loop. Under these circumstances, the Fed needs to adopt the strongest monetary tightening measures since the 1990s this week (announcement of a 50bp rate hike and the start of a balance sheet contraction).

Health remains a concern in China, which has a significant impact on the Chinese economy in the short term. The explosive growth in cases and the low immunization of the population have forced authorities to maintain a zero-corona strategy due to the strain on the healthcare system. This has forced authorities to blockade or limit a significant portion of the country that currently covers areas that provide more than a quarter of China’s GDP. These health restrictions have a significant impact on China’s short-term growth, as indicated by the official decline in China’s PMI in April. In fact, the manufacturing PMI dropped from 49.5pt to 47.5pt, and the non-manufacturing PMI dropped from 49.5pt to 41.9pt. Both are the second lowests in history since February 2020, well below the limits that indicate activity stability (50pt). Unless the epidemic in China is curbed, the risk to growth remains downside, which could further exacerbate tensions in the global production chain.

China's PMI drops sharply again in April in the active contraction zone

That said, officials maintained their 2022 economic target (GDP growth of 5.5%) to support the economy and markets, according to last week’s Politburo survey (the highest governing body chaired by Xi). Is accelerating. In particular, authorities are accelerating support for infrastructure projects and SMEs, adopting a more friendly tone for the digital platform and real estate sector than at the end of 2021. This support is more progressive than the recent stages of China’s slowdown, supports targeted and gradual measures, and is only effective if the epidemic situation is controlled. However, more aggressive policies should limit systemic risk and allow for a significant re-acceleration of the economy this summer.

Eurozone GDP growth slowed in the first quarter, + 0.2% after + 0.3% in the first quarter of 2021. Geographically, this reflects Germany’s recovery in GDP (+ 0.2% after -0.3%) and Spain’s continued recovery (+ 2.2% after + 0.3%). France’s stagnation (+ 0.7% after 0.0%) and Italy’s contraction (+ 0.6% after -0.2%).

Eurozone: GDP is advancing at a limited pace at t &

If the details of Eurozone GDP have not yet been released, France’s GDP has been released.The stagnation in France’s activity in the first quarter shows that it was due to a decline in consumption, And don’t you like US GDP? For volatile elements. However, this slowdown is probably due to the waves of Omicron at the beginning of the year, and the momentum of France’s recovery does not seem to be questioned so far.

In fact, France’s GDP growth was 0.0% in the first quarter after being revised upward to 0.8% in the fourth quarter of 2021. This is below the consensus expectation of + 0.3%. In particular, GDP breakdown shows that this disappointment is not due to instability, as foreign trade and inventories made a positive contribution to Q1 activity (especially thanks to cruise ship deliveries). .. In fact, a sharp decline in household spending (consumption -1.3%, real estate investment -1.1%) reduced domestic final demand (GDP excluding inventory and trade) by 0.6% this quarter. This suggests that the Covid wave earlier this year was worse than expected. That said, business investment remained strong in the first quarter (+ 0.7%), clearly above pre-Covid levels. And if you believe in the sharp drop in unemployment in the first quarter (-164,000), employment continues to rise. Therefore, until at least March, the momentum of business expansion did not seem to be an issue, despite the fluctuations in consumption associated with the epidemic wave.

France: Consumption declines but investment is resilient

In the United States, the Fed’s favorite inflation index fell in March for the first time since 2020, after an unexpected decline in GDP in the first quarter (-0.3% overall quarterly). Can the Fed be more careful? That is unlikely to be our view.

As I explained on Friday, the decline in GDP in the first quarter was deceptive, as the final domestic demand remained dynamic, but only due to the volatility of foreign trade. This was confirmed by the March consumption figures, which indicate a 1.1% increase in household spending in March. On the inflation side, the consumer price index (PCE) has accelerated from 6.3% to 6.4%, slightly below March’s expectations, despite a surge in energy and food inflation. In fact, the underlying consumer price index (excluding energy and food) has slowed slightly from 5.3% to 5.2%. This is important because this inflation indicator is a Fed favorite. However, this deflator remains very high, exceeding the Fed’s target level of twice (2%). Above all, it slows down very slowly and should well exceed the Fed’s goals for at least 2022 and 2023. Indeed, sustained price movements will be largely unstable in March, wages will continue to accelerate and may increase the risk of wage price loops. The “cleanest” indicator of wage growth surprised upwards in the first quarter. This shows the strongest wage increase in more than 20 years (+ 4% to + 4.5% at the end of 2021). And the resignation rate suggests that wage pressures will continue to rise in the coming months. Under these circumstances, the Fed is unlikely to adopt a less cautious tone regarding the risk of sustained inflation in the coming months.

USA: Inflation probably peaked but remains very high

USA: Wage growth is still accelerating