Mounting worries about the global economy

Despite the poor economic data recently published, equity markets rebounded at the end of last week as interest rate expectations were revised downwards. Unrelenting high inflation has prompted central banks to end the era of easy money and raise interest rates, bringing down stock markets as companies face higher commodity prices, higher wages and the cost of money. In this context, every sign of an upcoming plateau, peak or decline in inflation has a positive impact on the equity markets and particularly on the technology stocks listed on the Nasdaq. Thus, fears of a global economic downturn and the recent fall in commodity prices have paradoxically provided relief for investors. Faced with economic uncertainty, oil prices have fallen back, with US WTI losing $20 a barrel since its mid-June high of $123. Industrial metals such as zinc, tin and aluminium have also fallen sharply. The price of copper, considered a leading indicator of the global economy, has fallen more than 11% in a fortnight, to its lowest level since February last year. It has been similar for agricultural commodities, where better-than-expected harvests have brought about lower prices despite the situation in Ukraine.

However, since the beginning of the week, oil prices have strengthened on reports that the United Arab Emirates and Saudi Arabia are nearing full production. Political unrest in Libya and Ecuador is also weighing on supply. To top it all off, the health situation in China is improving (no new COVID cases in Beijing yesterday according to the authorities) and the government has decided to ease some restrictions. This is raising hopes for more sustained growth in the coming months. This news sent metals higher this morning and WTI crude oil reached $111 a barrel.

As we said before, economic statistics were not great this week. The consumer confidence index fell again, both in the euro area and the US. The purchasing managers’ indices for both areas are also showing a slowdown in activity in the manufacturing sector and in services. In the US, existing home sales fell for the fourth consecutive month to a two-year low. Rising mortgage rates are holding back activity, but prices have not come down as demand still outstrips supply. In Germany, the Ifo business climate index also fell more than expected. In all cases, the problems are known: economic uncertainty, inflation and logistical and supply problems. Our German neighbours must also start thinking about the risk of a gas shortage next winter.

In this context of risk and uncertainty and following the SNB’s decision to raise its key rate, the Swiss franc continues to appreciate and is approaching parity against the euro. Meanwhile, as the euro loses ground, ECB President Christine Lagarde spoke from Sintra, Portugal, at a meeting of the world’s leading central banks. Ms. Lagarde’s remarks were in line with expectations: She stressed the importance of combating the fragmentation of eurozone yields. New asset purchase programmes should avoid widening the spreads. As for rates, the ECB may be planning a gradual rise (a 25–basis point increase is expected in July), but it has not ruled out stronger action in the event of a further deterioration in inflation over the medium term. Yesterday, New York Fed President John Williams also spoke on US television. His main message was that he expected a slowdown in the economy but not a recession. He predicted growth between 1% and 1.5% this year, while the FED a fortnight ago was forecasting 1.7% and up to 2.8% at the beginning of the year. Regarding the level of the key interest rate to be decided at the next meeting on 27 July, Mr Williams said that the choice would be between a 50 or 75 basis point increase. Finally, he sees the slowdown in the economy as necessary to fight inflation.

US and European bonds moved in opposite directions yesterday. In the US, investors were concerned about the fall in consumer confidence. The 10-year Treasury yield ended the session down 1.6 bps at 3.18% while the 2-year lost 1 bp at 3.11%. In Europe, the German 10-year government bond rate rose by 8 bps to almost 1.63% and in Switzerland, the yield on the 10-year Swiss government bond also rose by 5 bps to 1.35%.