Asset Management Europe: Monthly Macro Insights – January 2023

Marc-Antoine Collard, Chief Economist, Director of Economic Research, Asset Management, Europe

As expected, a fall in global inflation is underway, but labour markets remain tight. Correspondingly, the dilemma for central banks has become extensively complex amid an unintended easing of financial conditions as investors have become increasingly optimistic that a monetary policy pivot will take shape in the next few months and China will re-emerge as an engine of the global economy.

China’s V-shaped growth hope

China’s sudden and rapid relaxation of stringent Covid-related restrictions appears likely to deliver a deeper near-term contraction than expected as the unprecedented surge in infections has resulted in a notable hit to the economy. The weeks before the Lunar New Year holiday will be challenging for the service sector as mobility could be negatively hit by people’s fear of catching Covid. Surging infections could also cause temporary labour shortages and increased supply chain disruptions, with global repercussions on price pressures.

However, new cases might peak in early February, directly after the holiday, and the economy would thus recover from Q2. Furthermore, policymakers have set out plans to expand domestic consumption and investment. That said, the export sector is still facing headwinds from weakening external demand on the back of growing global recession fears amid rising interest rates, inflation and the war in Ukraine.

Monetary dissonance with markets

The S&P Global manufacturing business confidence index was marginally lower in December to 48.6, while confidence remained stable in the services sector at 48.1 also in contraction territory. Although the levels remain depressed, investors hope the relative stabilisation points at a bottoming in the global growth slowdown at the turn of the year.

The ECB retained a hawkish stance at the December meeting. It is likely that headline inflation has peaked in the Eurozone. However, although European natural gas prices fell back to their pre-Ukrainian war levels, the impact on consumer energy prices is uncertain as governments gradually unwind earlier programmes designed to insulate consumers from big energy price swings. What’s more, underlying price pressures are not showing signs of abating and the ECB may have to hike rates higher than market participants anticipate.

In the US, labour market data are sending mixed signals. Jobs growth remained solid and the unemployment rate unexpectedly edged back down in December to its 3.5% cyclical lows. Furthermore, job openings eased only slightly in November. On the other hand, average hourly earnings growth has somewhat moderated. This development, combined with signs of slower growth momentum in both the ISM manufacturing and services business confidence indexes, instilled hope that the Fed can indeed achieve a soft landing and ease off the brake at some point this year. Fed funds futures markets are now pricing in a terminal rate of 5% by H1 2023, and thereafter a -40 bps reduction by the end of the year.

Yet, the latest Fed meeting minutes showed that, in notable contrast with market pricing, none of the 18 members anticipated that it would be appropriate to begin reducing the fed funds rate in 2023 given continued risks for more persistent inflation.

Completed writing on 10 January 2023

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