The central banks’ strategy for dealing with the almost impossible task of fighting inflation without causing a recession is now clearer. In particular, the Fed’s Jerome Powell made it clear in Jackson Hole that he intends to continue raising rates. As Credit Suisse (Switzerland) CIO Burkhard Varnholt notes, this marks a clear break with the “Greenspan put”. The Fed is no longer going to support the markets, especially equities, at all times in times of weakness. On the contrary, the Fed chairman stressed that tightening would not be “painless”. Tightening later would be even more painful. But for the first time since the 1980s, bond markets are in a bear market. Rate increases have become too fast for them. Without causing a new debt crisis: leverage is much lower than before the 2007/8 financial crisis.
Dollar above parity against the euro
For the September meeting, an increase in the key rate is therefore planned. The question is only whether it will be 50 or 75 basis points (bps). The 20 bp rise in unemployment to 3.7% in August seems to argue for the more modest variant. However, the dollar’s easing was only very short-lived on Friday 2 September. As a result, after having strengthened to above parity against the euro for the first time, the US dollar is holding at this historic level. The European single currency lost almost 3% in August. Against the yen, the dollar marked its highest level since 1998. This is increasing the pressure on the ECB. The consensus of economists, according to Bloomberg, is that the ECB has acted too slowly to fight inflation. At its next meeting on 8 September, a 75 bp hike is expected. This means that, like the Fed, the ECB will give priority to fighting inflation over the danger of recession. Two quarters of negative growth – but no more – now seem inevitable.
Energy, the issue of concern to Europe
The rise on the energy side remains strong. For example, oil prices in dollars stabilised in August. But they still rose in euro terms. On the gas side, fears of a possible prolonged total cut-off of Russian supplies led to a price on the benchmark spot market, the TTF, above 300 euro per megawatt-hour (MWh) for the second time since the start of the war in Ukraine. It seems to be confirmed that Russia is not doing anything to reassure, but is instead determined to use its gas as a weapon against European consumers. Prices for electricity are even higher. At around 30 euros for many years, the MWh has been costing 1000 euros and more. Energy is thus responsible for almost half of the inflation in the Eurozone, which remains above expectations, at 9.1% in August, a new all-time high. It is to be hoped that the gas stocks filling up faster than expected will cause a reversal of the trend. In the US, this has already happened in July, and should be confirmed in August – even if wages continue to rise.
Reorganisation of the value creation chains
More and more economists also point to the adaptation of production processes to the fragility of supply chains. The creation of larger stocks, production capacities in more secure locations, better in line with democratic values or even closer to the end customer, the establishment of alternative sources for critical components, the desire to directly control a larger part of the value chain are all measures that increase costs, and therefore fuel inflation. Digitalisation can, however, counteract this to some extent.
PMI indices leave little scope for optimism
The PMI indices are not in great shape. The manufacturing PMI for the US is at its lowest level since July 2020, at 51.5 points, mainly due to a drop in new orders. The services PMI sank further into contractionary territory, to 44.1 points (-3.2), as consumers curbed their spending. In the Eurozone, the Manufacturing PMI is still pointing to a slight decline, to 49.7 points, due to weak demand. The services PMI fell by 1 point to 50.2 points, as the recovery in tourism could hardly offset the rising cost of living.
