Inflation remains one of the most important macro issues. In contrast to the previous month, it became clear in June that central banks on both sides of the Atlantic intend to adopt different paces in response to this threat. The Fed is now discussing when it should end its $120 billion per month debt buybacks. From 2023 (instead of 2024), it should proceed with rate hikes. This acceleration was felt on the currency market, with the dollar rising sharply against the euro. The euro fell below the 1.20 dollar mark. The Fed still believes that the current price increases should largely remain temporary. According to Fed Chairman Jerome Powell, it is easier to create demand than to bring production back to normal. But by adopting an earlier timetable, the Fed recognises that the danger of persistent inflation has increased.
Labour shortage
To see whether even a vicious price-wage circle could develop, one has to keep a close eye on developments on the labour market. In June, 850,000 jobs were added, more than expected. But compared to the pre-pandemic trend, there is still a shortfall of 10 million jobs. According to Safra Sarasin’s analysis, the problem is on the supply side, i.e. the workers. They would be reluctant to return to the labour market, provided they had not gone into (pre)retirement. The 3.6% rise in hourly wages in June indicates that the balance of power favours workers. The bond market, however, interpreted the data as reflecting a slight easing of pressure. The yield on 10-year Treasury bonds fell in June by almost 20 basis points.
Transport and raw materials are expensive
Transport prices remain at very high levels. Capacity remains tight both on the maritime side (the Suez Canal problem has not yet been fully resolved) and on the air side, where the number of passenger flights is still lower than normal. As for oil, the price of a barrel of crude oil has the $80 mark in its sights, after having gained 45% since the beginning of this year. And OPEC is struggling to find a new agreement.
There is no sign of improvement in the semiconductor sector either. These factors increase producer prices, and often also limit capacity. One of the key questions is therefore to what extent price increases from across the Atlantic can spread to other regions. Another key variable is the scope for companies to pass on their higher costs.
ECB does not want to review its policy
The prevailing interpretation so far, including within the ECB, is that the increases due to these restrictions are temporary. As the return to normalcy after the pandemic progresses, supply chains should also recover. The ECB thus considers it premature to even discuss a slowdown in the pace of debt purchases, after this spring’s increase. This did not prevent it from raising its growth forecast by 60 basis points to 4.6% for this year.
PMI figures still very high
The PMI indices confirm the very good development of orders in industry, with a record score maintained in the United States (62.1 points), albeit slightly lower than expected. The services sector even recorded a sharp decline since the May record (64.8 instead of 70.4 points). The services sector was affected by the labour market situation, with costs rising at the second fastest rate in history, driven by wages and transport.
Scores were more pleasing in Europe. In industry, a new record was set at 63.4 points. Order books are filling up very well, to the extent that delivery times are getting longer. However, confidence in future production has risen by points.
However, confidence in future production has risen by points.
Services are expected to grow at the fastest pace since July 2007, according to the 58-point PMI score achieved in June. They are still in the recovery phase, triggered by the easing of sanitary measures.
