All is Well

The macro point

Gone are the recession fears! That was last year. Everyone agrees that the American economy is in great shape, despite concerns related to the trade war. Who do we thank for that? The top 10% wealthiest. According to a fascinating study by Moody’s published last week, they are the ones supporting the American economy. The top 10% of households earning over $250k/year now account for 49.7% of spending (vs 36% in 1994) - a historic record. Their consumption jumped by 12% between 2023-2024, while that of the middle class declined due to the wave of inflation. Moreover, asset valuation (real estate, stock market) boosted their net worth by +45% since 2019 (+$35 trillion). In total, 1/3 of the American GDP now depends on this elite consumption. Is this a sign of fragility? Not necessarily. Admittedly, in case of a stock market downturn or real estate decline, this could slightly jam the machine. But even in this negative scenario, they would maintain a high purchasing power, which would automatically limit the damage.

The situation is diametrically opposed in Europe where consumption (no matter the social category) remains sluggish. It is even well below its long-term average. The reasons are an inability to sufficiently raise wages during periods of inflation, productivity (and thus wealth creation) that is still negative, and the absence of public support for purchasing power (let’s not forget that the Americans distributed checks to households during Covid and that Musk wishes to act again this way due to the reduction in public spending). Economically, there's no comparison; the United States is in a much better position than the eurozone, both this year and in the longer term.

In China, no new statistics. However, there are increasingly insistent rumors about a potential massive economic stimulus in March. The currency market mentions a stimulus plan of 10% of the economy. In theory, this would be massive. However, it is necessary to see in practice what this entails. It is not impossible that the much-discussed stimulus plan mainly involves rolling over existing debt, to prevent the real estate sector from being further troubled. As long as there is no clear strategy to support household spending, we doubt that the Chinese economy can restart strongly. It has already been six consecutive quarters that China is in deflation. The Japanese example shows us clearly that once in deflation, it is extremely difficult to exit. It can even last for decades...

Another highlight of last week is the stabilization of the Indian rupee, despite mixed signals. The interventions by the central bank seem rather effective. Caution is advised, though, as the Indian market is known for experiencing significant fluctuations, sometimes higher than in other emerging markets. Furthermore, since last September, there has been massive sell-off by foreign investors leaving the Indian stock market, which puts strong downward pressure on the currency. We do not rule out that the rupee's fall may resume, given the rather negative sentiment of funds towards India (this is a complete change in attitude compared to the somewhat naive optimism that prevailed in 2024).

Technical point

On the foreign exchange market, the euro holds up despite the prospect of a prohibitive tariff on European goods. This resilience of the single currency is largely explained by the fact that capital flows continue to pour into Europe from abroad, notably to be invested in European stocks that are heavily undervalued compared to American stocks (a 33% differential!). Of course, this phenomenon will not last forever. But it helps the euro in the short term. This allows, for example, the EUR/USD pair to stabilize around the pivot point at 1.05.

Announcements to follow

A busy week for statistics and central banks. Starting this morning, Eurostat will publish the February inflation figure for the eurozone (previously at 2.5% year-on-year). No surprises expected. We still expect the European Central Bank (ECB) to cut its key interest rate by 25 basis points during its Thursday meeting. This is fully anticipated by the market. Finally, towards the end of the week, the latest figures for the US job market for February will need to be watched. There are a few tensions, notably a lengthening of unemployment compensation duration. Nothing alarming. But it is evident that the labor market is slowing down. It will also be necessary, in the longer term, to evaluate the impact of massive layoffs expected from the public sector as part of the spending reduction policy highlighted by Elon Musk.

The information presented in this publication is provided for informational purposes only and does not constitute investment advice, an offer to sell, or a solicitation to buy, and should not be used or considered as an incitement to engage in any investment whatsoever.