The pace of central bank rate hikes is more than ever the focus of macro analysis. Concerns about energy prices and the supply chain have taken a back seat. The effect of a warmer-than-feared December remains, with both gas and electricity prices far from their record levels. As for supply, the reopening of China has reversed fears. Channels from China should unblock, but European companies will have to be able to cope with the additional demand from the Middle Kingdom. Nevertheless, inflation is still a topic of debate on both sides of the Atlantic.
Central Banks are standing firm
Indicators are reassuring. Inflation is falling faster than expected. In the euro area in particular, inflation reached 8.5% year-on-year in January, compared with forecasts of 9%. Compared to December, prices fell by 0.4%. However, core inflation remained stable at 5.2% and is thus maintaining some pressure. It can thus explain the firmness in the ECB’s speech on the occasion of its latest decision at the beginning of February. Not only did it raise the key rate by half a percentage point to 3%, but it is planning a further increase at its next meeting in March.
The Fed has also been more hawkish than expected, despite inflation falling for the sixth consecutive month in December, to 6.5%. According to its announcements, the Fed Funds rate will have to rise to at least 5% before the committee headed by Jerome Powell will consider a pause. At most, it will slow down the pace, with a quarter-point increase to 4.75%.
Decisions with little immediate effect
This did not prevent the dollar from losing weight: the euro momentarily broke the $1.10 barrier. However, unemployment at its lowest level since 1969, at 3.4%, added credibility to the Fed’s speech: it implies that the price-wage spiral could continue to fuel inflation without the central bank’s measures. And the dollar rebounded on Friday 3 February. Sovereign bonds did not react to the latest announcements either, not even those of particularly exposed states like Italy. This shows that the intentions of central banks must now be supported by macroeconomic data. Otherwise, the statements do not cause any change in the trend. And the scenario that the ECB will be more restrictive than the Fed in the coming months is already built into the exchange rates.
Consumer confidence is on the rise
The strong speeches of the central banks also underline once again that they are not afraid of a recession. Rather, they are willing to accept it, as it helps to bring price increases back to target. The development of demand in particular remains difficult to predict. According to the Conference Board, US consumers remain positive in their assessment of the current situation. However, pessimism prevails regarding future developments. In the euro zone, an upturn is clearly perceptible, with confidence in January 2023 at its highest level since February 2022. However, with -20.9 points (the value of 0, never reached since its creation, marking a neutral attitude), the index remains in a zone of marked pessimism. In 2022, US GDP still grew by 2.1% and that of the euro zone by 1.9%.
PMI indices on the rise
In particular, the PMI indices show a decline in new industrial orders. The PMI for the US is slightly better at 46.9 points, but still shows a contraction. In addition, the costs for companies have increased. The equivalent for the eurozone shows a slightly higher score of 48.8 points. Production costs have slowed down, while companies have been better able to pass on their costs.
On the services side, however, a rebound in new orders in the US has pushed the US economy back into the expansionary zone, from 49.2 points in December to 55.2 points. Business activity also picked up. In the eurozone, too, the index is pointing towards growth for the first time since July 2022, at a score of 50.8 points (+1 point compared to December). The rise in production costs has somewhat weakened
