A Two-Speed Economy

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The macro point

On both sides of the Atlantic, the economy is more resilient than anticipated at the end of 2022. However, there are clear points of fragility (rising cost of borrowing and refinancing conditions, a lagging manufacturing sector, declining international trade, etc.). This confirms the scenario of an economic slowdown this year, marked by sustained high inflationary pressures. This will certainly force central banks to tighten their monetary policy more than expected in the short term... At the end of 2022, analysts predicted a significant recession in the eurozone in 2023 (with a possible GDP contraction of nearly 1% at times!). The latest activity indicators for the Monetary Union concerning the month of February confirm that this scenario is unlikely to occur. The composite activity indicator (which includes both manufacturing and services activity) is now in expansion territory, above the level of 50. It has reached 51.6 compared to 49.1 in January. This is a seven-month high. The situation is similar in Germany with a composite index at 51.1. However, not everything is rosy. Activity is only sustained by the services sector. The manufacturing sector and export orders are lagging. In France, new export orders have been declining for a year, for example. The decline recorded in February was even the largest since the 2020 lockdown period. This reflects the slowdown in global trade (the analyst consensus predicts a 4% drop in transported volumes this year, which is huge). The economic landscape is therefore far from uniform.

The same observation applies when considering the typology of companies. There are evident pockets of fragility at the level of SMEs and mid-size companies. We are beginning to see sectors where cash flow problems arise in France. This often goes hand in hand with difficulties in recruiting qualified labor. With the rise in policy rates (to combat inflation), financial players are more reluctant to lend at low rates (the risk premium mechanically increases). We particularly have in mind the case of a SME-type company (we do not mention the name, for obvious reasons) that had to refinance a Euro PP (a bond placement considered relatively low-risk among a limited number of institutional investors). A year ago, the proposed rate was 3%, which was quite reasonable. It is now at a prohibitive level of 9%. This example (and there are many others) highlights the diversity of the French ecosystem. Overall, it holds up. Large companies are even doing very well (just look at the quarterly results being published, notably those of Accor or Eramet – a major player in the metallurgy sector). For smaller companies, it is sometimes more complex. There is a bit of everything. It is likely that the State will have to, on a case-by-case basis, still play the role of firefighter in the coming months and quarters. We are not about to exit the 'whatever it takes' phase (even if the extent of economic support measures has significantly decreased since the beginning of the year).

Overall, we remain convinced that a recession will be avoided in the eurozone. Some of our neighbors in Central and Eastern Europe are experiencing a technical recession (two consecutive quarters of GDP contraction). But it is of low magnitude. This is particularly the case in the Czech Republic or Hungary. On the U.S. side, there weren't many important statistics last week. Our scenario remains the same as unveiled at the beginning of the year: no recession either, just an economic slowdown with inflationary pressures that remain concerning (the core PCE index, which is the Federal Reserve's preferred measure of inflation, increased by 0.6% in January over one month – much more than the forecast of 0.4%). As long as credit flows continue to support the U.S. economy (notably the real estate sector), a widespread recession is unlikely. The job market, even though it is a lagging indicator by about six to nine months compared to the economic cycle, is another factor showing the great resilience of the U.S. economy. The prognosticators of doom were wrong. There will obviously be a recession sooner or later; it is the normal economic cycle. But saying it could happen this year seems speculative.

Technical point

In the foreign exchange market, there is no drastic change in trend. Volatility has also been relatively low for several weeks on major currency pairs. The EUR/USD is now evolving around the 1.0550 zone. This level is starting to be interesting for dollar sellers. In the medium-term, fundamentals (excellent resilience of the European economy and capital inflows into the eurozone supporting the single currency) argue for a return of the euro's upward trend. The trend remains unchanged for the EUR/CHF. The foreign exchange market considers that the Swiss National Bank (SNB) will be more hawkish (in favor of monetary tightening) than its eurozone counterpart. Since the beginning of the year, the pair has lost 1.38%. This is just the beginning. We expect a return to the 0.97-0.98 range in the short term. Finally, nothing very new for the EUR/GBP which remains anchored in a wide fluctuation band of about 200 pips for several months (around 0.88-0.90). Despite the economic chaos reigning across the Channel, the pound sterling does not react more than that. It's also proof that the forex is sometimes disconnected from macroeconomics (which can happen in the short term). The support and resistance levels shown below indicate the low and high points within which prices should evolve during the week.

	Weekly Supports		Weekly Resistances
	S2	S1	R1	R2
EUR/USD	1.0336	1.0495	1.0750	1.0830
EUR/GBP	0.8615	0.8720	0.8936	0.9044
EUR/CHF	0.9760	0.9800	0.9970	1.0045
EUR/CAD	1.4115	1.4220	1.4498	1.4608
EUR/JPY	139.01	141.03	143.95	145.06

Announcements to follow

We do not expect this week to be decisive from a macroeconomic perspective. The first estimate of inflation (consumer price index) in the eurozone in February is THE major statistic. The analyst consensus expects a decline to 9% annually - a drop of two basis points. It's little. This will not change the situation regarding the monetary policy trajectory in the eurozone. No one doubts that the European Central Bank (ECB) will increase its key rate in March by 50 basis points. However, the future raises more uncertainties. Additional indicators, particularly on inflation, will be needed to determine if smaller rate hikes (25 basis points) are appropriate. Below are the publications and events expected to have a major impact on currency price developments.

Day	Time	Country	Indicator	What to Expect?
28/02/2023	16:00	USA	Conference Board Consumer Confidence (February)	Expected increase to 109.5 from 107.1 in January.
01/03/2023	16:00	USA	ISM Manufacturing PMI (February)	Increase expected to 47.9 from 47.4 in January.
02/03/2023	11:00	EUR	Consumer Price Index (February)	1st estimate for February at 9.0% annually compared to 9.2% previously.
03/03/2023	16:00	USA	ISM Non-Manufacturing PMI (February)	Slight decline expected to 54.2 but still far from danger zone.