The dollar falls back and appetite for risk returns

Last week, the IMF revised its growth forecast for next year downwards. It now expects global growth of 2.7%, down from 2.9% in the previous report in July. This is the weakest growth profile since 2001 except for the 2008 global financial crisis and the acute phase of the COVID-19 pandemic. Persistent inflation is currently a global phenomenon. And while it is affecting advanced economies, emerging and developing countries are suffering even more. Global inflation is expected to reach 8.8% this year (+0.5% compared to July) but could peak in the third quarter and fall in the fourth. In the US, growth has been revised to 1.6% in 2022 and 1% in 2023. In Germany and Italy, a recession seems inevitable in 2023 as energy costs are expected to weigh on the industrial sector. France could fare a little better with growth of 0.7%. China could grow by 3.2% this year – the worst performance in 40 years, pandemic aside – and 4.4% in 2023. Its zero-COVID policy appears to be putting the brakes on growth. It is also noteworthy that China has decided to postpone the publication of its quarterly growth forecast previously expected on Tuesday. Affected by sanctions, Russia will enter a recession this year but it should be less severe than expected: the contraction should be 3.4% against 6% expected in July. According to the IMF, “[t]he contraction in Russia’s economy is less severe than earlier projected, reflecting resilience in crude oil exports and in domestic demand with greater fiscal and monetary policy support and a restoration of confidence in the financial system”.

In the US, with one month to go before the mid-term elections, inflation is only slightly down. The consumer price index (CPI) released Thursday by the Labor Department shows that prices rose at an annualised 8.2% in September. One month earlier the price increase was an annualised 8.3%. On a monthly basis, inflation is actually still rising: +0.4% between August and September against +0.3% expected and against +0.1% between July and August. President Biden is now admitting that the US could see a mild recession and saying there is still work to be done to fight inflation. In the UK, Kwasi Kwarteng has just ended the second shortest stint as Chancellor of the Exchequer since World War II. He was fired by his long-time friend, Prime Minister Liz Truss. His successor, Jeremy Hunt, has now reversed almost all the tax measures that had plunged the UK into crisis. Ms Truss has apologised for mistakes made, but is trying to keep her job. In recent days, the pound sterling has stabilised at around 1.13 against the dollar.

13 October was a particularly interesting day for the equity markets as after six consecutive days of declines, following the release of persistently high inflation figures: the S&P 500 rose 5.5% to achieve the fifth-largest intraday reversal from a low in its history. The Dow Jones, which was down 500 points, ended up gaining 800 points to exceed 30,000 points at the bell. The next day, a bad indicator pushed the markets back down: the University of Michigan’s inflation expectation survey showed that households expect inflation to remain relatively high in the future. But since last Wednesday, the Dow Jones has gained nearly 1,300 points and the S&P 500 143 points. This renewed optimism is fuelled by the improved situation in the UK and better-than-expected corporate earnings (notably from the major US banks). As an appetite for risk has grown, the dollar has fallen back, to below parity against the Swiss franc, for example. On the other hand, the yen continues to fall against the greenback. The USD/JPY pair stood at a spot level of 149.48 this morning – a 32-year high. Japan’s central bank is the last central bank to hold on to a negative rate and some analysts believe it could intervene to support its currency.

Moving on to oil, the outlook for its demand remains gloomy. The Organization of the Petroleum Exporting Countries (OPEC), the International Energy Agency (IEA) and the US Energy Information Agency (EIA) anticipate less robust demand than expected in 2022 and 2023. Natural gas continues to fall, with the Dutch TTF futures contract, the benchmark for natural gas in Europe, currently trading at €111 per megawatt hour, well off the peak of €340 in August. The opening of a Greek-Bulgarian gas pipeline and the supply of liquefied natural gas from the USA have enabled Europe to emancipate itself from Russian gas: the latter has fallen to 7% of the EU’s imports compared to 42% at the start of the Russian invasion of Ukraine. Starting tomorrow, leaders of the 27 EU member states will meet to formalise their solutions to soaring gas prices. There is talk of reforming the TTF index and the introduction of grouped purchases. On the other hand, it seems that a gas price cap is no longer on the agenda.