The Eurozone’s performance isn’t bad compared to others

  • The markets are still very volatile, with no clear trends for two weeks. This reflects the uncertainty about growth prospects in a context where central banks are not willing to question the normalization of their monetary policy due to inflation concerns.
  • The negative shocks to growth and positive shocks to inflation continued, with the health restrictions imposed in China continuing and the price of oil rising towards $115 per barrel. The latter is due to the lack of a marginal product to replace Russian oil if necessary. Saudi Arabia does not want to increase its production, and an agreement between the United States and Iran remains elusive. This makes an agreement among EU countries on a Russian oil embargo less likely, especially after Orban (the embargo’s main opponent) declared a state of emergency in Hungary yesterday. Political and geopolitical risks not conducive to calm: The US is expected to present its strategy towards China in the coming days while today the British Prime Minister faces a report on his participation in banned parties during confinement. “Partygate”) and always threatens to call into question the Brexit agreement relating to Northern Ireland.
  • The PMI business confidence indicators for May fell a little more than expected, but remain in growth territory. This confirms the slowdown in the global recovery, but leaves open the question of how much that slows in the coming quarters. Note that activity appears to be slowing significantly in the US (PMI fell from 56 to 53.8 points). In particular, real estate suffered the largest drop in new home sales in nearly 10 years in April, due to higher prices and interest rates. On the contrary, activity is holding up better than expected in the Eurozone (composite PMI of 54.9 for May, slight rise in IFO indices for Germany and INSEE indices for France).
  • These positive eurozone economic surprises, combined with tougher rhetoric from the European Central Bank, have enabled eurozone assets to outperform, with the euro and dollar exchange rate rebounding more than 3% over the past week (to 1.07) and stocks surging European stocks are down 8% from their March low (for Eurostoxx) while US stocks are down 5% from their early March level. This supports our notion that a lot of bad news is being priced into European assets which could slightly outperform US assets in the coming months.
  • US growth concerns are prompting markets to slightly revise their forecast for a Fed rate hike by year-end (to 180 basis points from 200 basis points last week), which is now roughly in line with our expectations (175 basis points). Conversely, markets continued to expect further rate hikes from the ECB after Lagarde announced that the ECB should exit negative rates by the end of the third quarter, which means a 25bp hike in rates in July. and September, before continuing gradual increases in the following quarters towards the neutral rate (which the European Central Bank estimates at 1.5%). While the 100 basis point rise in market prices between now and the end of the year looks fierce to us (we expect three 25 basis point hikes), we believe the risk is that the ECB will raise rates beyond 1,35 % forecasts the market for the next few years. That is why we remain cautious about Eurozone public bonds.

Eurozone activity remains strong, at least with regard to the May PMIs are generally stable and in line with expectations. Purchasing managers note that production growth remained strong in May, with the composite PMI at 54.9 points after 55.8 points in April. This level historically represents quarterly growth of about 0.5%, which is higher than the first quarter’s growth (0.3%).

From a sectoral point of view, the Services PMI reversed its sharp rise in April, but remained very high at 56.3 points. Business in the services sector continues to indicate strong customer demand, indicating that reopening the economy and rebalancing consumption from goods to services continues to support the recovery. In the industry, enthusiasm is more moderate with the manufacturing PMI of 54.4, the lowest since 2020, but still clearly in expansion territory (above 50 points). Still being penalized by the consequences of the Chinese government’s “zero COVID” strategy, the war in Ukraine, all of which are shocks that contribute to straining supply chains and creating delivery delays, are undermining the downturn in business for most sub-sectors. . Note, however, that this demand holds up well. The auto sector is even showing the first signs of improvement after the complicated period in which it engaged for a few months, allowing the German manufacturing PMI to increase slightly in May (to 54.7 points), in contrast to the index in the rest of the period. Euro-zone.

outside the eurozoneJapan continues to benefit from its recent reopening (composite PMI hit its highest since December in May at 51.4) but activity is slowing markedly in the Anglo-Saxon world.

Across the channel, the composite PMI drops to its lowest level in more than a year It is approaching the stagnation area (at 51.8 points). It was mainly service providers who suffered from the services PMI drop from 58.9 points in April to 51.8 points in May, while the consensus was expecting only a slight decline to 57 points. Companies in the sector attribute this poor performance to increased input costs and weak order books (except for the tourism and leisure sector). These figures, like those of household confidence, (at its lowest levels in nearly 40 years) reinforce fears of stagflation in the UK, which are of interest to all developed countries but are stronger across the channel with inflation already at 9% and additional negative shocks such as those related to Brexit. Note, however, that companies continue to hire at a high rate and the government is preparing budget measures to help families deal with inflation, which may limit lower growth.

In the US, the composite PMI shows a somewhat clear slowdown in growth compared to April, down from its long-term average. At 53.8 points, compared to 56.0 points in April. However, it is still clearly in the growth zone. Activity is affected by an increase in input prices and a sharp acceleration in corporate costs (among the fastest in the index’s history), even in the services sector. This is not good news for the Federal Reserve, as it shows that inflationary pressures continue to spread throughout the economy. Note, however, that demand indicators are not weakening with strong orders, which support the strongest increase in employment since last summer. This does not indicate that a recessive momentum is about to begin.

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