Magic Solutions

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The macro point

Let's start with some good news: the energy crisis might be slightly less acute than expected. Natural gas wholesale prices for delivery in a month dropped by nearly 10% last week while European stocks are at their peak (which should logically help avoid shortages in the heart of winter). Moreover, Germany has sensibly decided to extend the life of three of its remaining nuclear power plants by a few months, until next spring. This should help get through the winter with fewer hitches. Nonetheless, electricity bills have significantly increased, especially for small and medium businesses (which, let's not forget, make up 95% of employment in France). According to figures from CPME (Confédération des Petites et Moyennes Entreprises), nearly 150,000 French companies face a serious risk of bankruptcy. For now, company bankruptcies are still close to their lowest point (around 34,000 annually according to the latest data). As we have often highlighted here, the energy crisis is enduring (it will take several years to create new infrastructures that are not dependent on Russia). So far, public authorities in Europe have not always been up to the task. Aid to households and companies is welcome. But it's a short-term solution. They too often favor magical solutions like group gas purchases and happy frugality to solve long-term problems. This is insufficient. What needs to be done is certainly to rethink our energy mix and invest now. From a macroeconomic perspective, this means we will likely have to get used to enduringly higher energy bills than before COVID. The crisis is not going to disappear in 2023. Across the Channel, chaos continues. The political situation increasingly resembles some emerging countries. Prime Minister Liz Truss was pushed to resign. It's the shortest term in British history: 45 days. Truss stayed longer campaigning to be prime minister than in office. For comparison, the length of her term is equivalent to the gestation of an elephant shrew (a magnificent little mammal found in Africa). Her successor should be known by the end of the week. It's staggering. Adding to that, inflation continues to rise. The consumer price index reached 10.1% on an annual basis in September (barely more than the consensus). Core inflation (excluding volatile components) is also rising to 6.5% annually. The peak might only be reached at the beginning of next year, within a range between 13% and 18%. The large forecast gap is due to the current difficulty in predicting price dynamics beyond two or three months. In France, INSEE, for example, recognized that the macroeconomic context is so volatile that a forecast beyond two or three months involves an unusually high margin of error. This is a problem for businesses that lack the necessary economic visibility to adjust their business plans for 2023. Across the Atlantic, the situation is more stable, fortunately. The mid-term elections happening in November aren't really at stake. It seems obvious that the Conservative Party will win them (but the Democrats should limit the losses). Attention is instead on the next meeting of the Federal Reserve (Fed), which will take place early next month. Several FOMC members spoke last week (James Bullard and Neel Kashkari, among others). There is a consensus on the need to significantly raise rates again (probably around 75 basis points) to fight inflationary pressures. All seem to agree that the ongoing process should last at least until the beginning of next year. Subsequently, the central bank could pause monetary policy to see if inflation sufficiently decreases. The latest economic indicators (like the Beige Book published by the central bank, which provides insight into the economic dynamics in the main US regions) confirm that the economy is slowing down. However, the risk of recession is distant. The labor market is resilient. The real estate market is deflating. Except in a few specific cities (notably in California and Texas), we can't talk about a real estate market crash. It remains, however, a point to closely watch in the coming months. On the foreign exchange market, the EUR/USD remains in a marked bearish trend despite rebound attempts that systematically fail. Over three months, the pair has fallen by 4.50%. There are a few important technical levels to breach before having a decrease acceleration (particularly the support area around 0.96). But it's only a matter of time before this happens. The EUR/GBP pair continues to hover in the 0.86-87 zone as in the last fifteen days. We remain bullish on the pair given the risks faced by the United Kingdom. A return to parity is unlikely, but we could see a rise towards 0.90 in the coming weeks. Finally, selling pressures are still intact on the JPY. The Bank of Japan cannot support the yen despite regular interventions in the foreign exchange market. The EUR/JPY pair is up 12% since the beginning of the year. However, the collapse is more marked against the US dollar (yen's fall by 30% over the same period!). It's simple: intervening alone in the forex market is always a failure. This is what we learn from past attempts. The same thing is happening now. The Japanese central bank is wasting its foreign exchange reserves for nothing. We are obviously bullish on the EUR/JPY pair. The supports and resistances displayed below respectively indicate the low and high points within which rates should evolve during the week.

	SUPPORTS	WEEKLY	RESISTANCES	WEEKLY
	S2	S1	R1	R2
EUR/USD	0.9370	0.9547	0.9903	1.0100
EUR/GBP	0.8334	0.8512	0.9047	0.9120
EUR/CHF	0.9477	0.9600	0.9944	1.0090
EUR/CAD	1.3121	1.3300	1.3671	1.3855
EUR/JPY	140.68	143.46	149.02	151.81

Central banks are making a comeback this week. The Bank of Canada is expected to raise its key rate by 50 basis points to 3.75% on October 26. The end of the tightening cycle is certainly near in Canada as the real estate market shows worrying signs of fragility (the bubble has been growing for over ten years). In the eurozone, inflation is still a puzzle from the monetary policy perspective. We expect the European Central Bank (ECB) to increase its key rate by 75 basis points and announce further hikes to come (this corresponds to the analysts' consensus). Will this be enough to revive the euro? We doubt it. Furthermore, the ECB should initiate the debate on balance sheet reduction as part of the monetary tightening process. A final decision should not be made until December. There should also be some more technical discussions to encourage commercial banks to repay in advance the loans granted under the very long-term refinancing operations (TLTRO) under ultra-favorable conditions. It's technical. It will have no notable effect on the currency market. Below you will find publications and events likely to have a major impact on currency rate developments.

DAY	TIME	INDICATOR	WHAT TO EXPECT?
25/10	10:00	IFO Business Climate Index (October)	Slight increase (analysts' consensus at 87.0 against 84.3 in September)
	16:00	Conference Board Consumer Confidence (October)	Expected drop to 106 against 108 in September.
26/10	16:00	Central Bank Meeting	Key rate increase to 3.75%.
27/10	14:15	Central Bank Meeting	50 basis point rate increase.
	14:30	Quarterly GDP for the third quarter	Consensus at 2% against -0.6% in the second quarter.
28/10	08:00	First estimate of GDP in the third quarter	Consensus at 0.1%.
	14:00	Consumer Price Index (October)	Expected decrease to 9.4% annually against a peak at 10% in September.