Patience

The macro point

Ultimately, patience will be required. In recent days, several members of the Federal Reserve (notably Bostic and Williams) have suggested that rates will remain unchanged in June and July because it will take several months to assess the impact of the trade war on inflation and growth. "It will not be in June or July that we will have a better understanding of the situation," said Williams, President of the New York Fed. At best, it will only be in September that a rate cut, likely of 25 basis points, will occur. The money market quickly adjusted its expectations without causing too much turmoil in USD pairs. That’s the good news of the week.

A small surprise from China with an unexpected reduction in the banks’ reserve requirement ratio. Unlike the central banks of developed countries which no longer rely on this tool, China uses it extensively to inject liquidity into the economy. A reduction in the rate allows banks to lend more. But this has the negative effect of increasing debt. Since the financial crisis of 2007-08, China's monetary base has increased on average by 13% per year. That’s massive. Based on the current USD/CNY exchange rate, it is twice as large as that of the United States. Concretely, this means that Chinese growth is largely artificial, driven by an excess of money in the economic and financial system, which inevitably leads to an explosion of debt and unproductive investments. Nothing very joyful…

Europe is also looking gloomy, notably France, whose growth forecast for this year has been revised downward to 0.6% by the European Commission, against an initial 0.8%. The situation remains unfavorable, marked by a contraction in capital expenditure by French companies since mid-2023, after a strong post-Covid rebound. It is unlikely that the 20 billion euros put on the table during the annual "Choose France" summit, which will be released over several years, will be sufficient to compensate for the lack of investment by French companies that could continue for a long time according to surveys conducted among business leaders. As always, the core issues are not being addressed. Media-friendly events that showcase how welcoming we are as hosts are fine. What is better is creating and maintaining fertile ground for businesses every day. Let's be concrete: companies need competitive taxation and labor costs, competitive energy prices, available land, appropriate standards and regulations, and a qualified workforce. These are the parameters we need to strengthen. The rest is just idle chatter and skillfully orchestrated communication. Let’s hope things change. Otherwise, we risk being doomed to stagnant growth.

Technical point

On the foreign exchange market, volatility is down. We continue to believe that the strong performance of the euro since the start of the year is not meant to last. It did not reflect a return of investor confidence regarding the eurozone economy – which is moreover struggling. It was actually the result of massive capital flows that were recycled into undervalued European stocks. These flows began to dry up starting in April. If this continues, the euro could lose some of its luster.

Be careful if you are exposed to the Japanese yen. The latest publication by the American stock exchange regulator shows that speculators are massively positioned to buy the currency. When there is such market consensus, it is never healthy. It is often in these circumstances that we see a sudden reversal of trend.

Finally, no major movements on the Australian dollar after the widely anticipated 25 basis point rate cut decision by the Reserve Bank of Australia.

Announcements to follow

It’s a new week that will be marked by U.S. statistics. Consumer confidence, measured by the Conference Board, will be released tomorrow for May. Additionally, the core PCE, which is the Fed's preferred indicator for tracking inflation, is scheduled for the end of the week. Regardless of the final figure, it should not alter the trajectory of monetary policy for now. As we mentioned earlier, it is on stand-by for at least the summer (except for a liquidity accident in financial markets, but that’s an unlikely scenario).

The information presented in this publication is provided purely for informational purposes and does not constitute investment advice, an offer to sell, or a solicitation to purchase and should in no way serve as a basis or be considered as an incentive to engage in any investment.