The Grand Dance of Central Banks

The macro point

At the same time last year, analysts were predicting a disinflationary shock. This did not occur. On the contrary, inflation increased and spread across all sectors of the economy, reaching very uncomfortable levels in several countries (sometimes double digits). For the year 2023, the consensus predicts a global recession (mild in most countries) accompanied by still high and volatile inflation. We share this view, although 2022 has clearly shown us that we must also consider alternative scenarios (why not a faster-than-expected decline in inflation if we try to be optimistic?).
The latest statistics confirm the risk of recession, in any case. The broad Eurozone tracking indicator EuroCoin, published monthly by the Bank of Italy, went from -0.31 in October to -0.62 in November. It's in recession territory. If we also consider the November PMI activity indicators (the final estimate was published exactly a week ago), we can expect a contraction of the Eurozone GDP of about 0.1% or even 0.2% this quarter. It's weak. Obviously, the extent of the GDP contraction in the first quarter of 2023 will strongly depend on the energy crisis's evolution. If we face rolling blackouts (localized and lasting a maximum of two hours), the economic impact will be marginal. It might be around 0.1 point of GDP at most. However, in case of an electricity shortage or blackout (which corresponds to a collapse of the electrical system), it will be much more noticeable. At this stage, nothing indicates that this last scenario is the most likely in Europe, and particularly in France.
International trade is also showing signs of running out of steam. This has been the case since the beginning of the summer. According to statistics published last week, China's exports (which remains the world's workshop despite its zero Covid policy) collapsed by 8.7% year-on-year in November. This is significantly more than what was anticipated by the consensus (-3.9%) and October's figure (-0.3%). The drop in exports affects all geographic areas: a 3.8% decrease to the United States, 9.3% to the European Union, and 4.6% to Japan. This clearly shows that the global economy is slowing down everywhere. There are no countries or geographic areas that are spared. It's hard to find a growth driver as we sink into recession (during the last financial crisis of 2008-09, China and to a lesser extent emerging markets served as growth drivers).
The news on the central bank front was weak last week. The Bank of Japan might begin a strategic review of its monetary policy. Among major countries, only Japan still has an ultra-accommodative monetary policy (notably marked by yield curve control to prevent the country's debt ratio from skyrocketing) while inflation in the archipelago is at an uncomfortably high level (over 3% year-on-year). But it will certainly take several months to initiate this process. In the meantime, the Japanese yen could remain structurally weak, particularly against the US dollar (an increase of the USD/JPY pair by over 18% since the beginning of the year). Finally, the Bank of Canada increased, as expected, its key rate by 50 basis points to 4.25% last Wednesday. The institution indicated that the pace of rate appreciation will depend on future conditions. Several members of the Board of Governors have expressed concerns about the magnitude of the ongoing economic slowdown. This could prompt the central bank to exercise caution in the coming months, particularly to avoid a too abrupt deflation of the housing bubble that has been growing for nearly a decade. The Canadian dollar did not capitalize on this decision. The EUR/CAD trajectory remains upward (notably due to the drop in energy commodities prices). We do not expect a short-term change.
In the foreign exchange market, last week was favorable to the euro. The single currency increased against all its major counterparts, except for the Swiss franc (EUR/CHF decreased by 0.39% over the last five sessions). The EUR/USD remained almost stable (an increase of only 0.16%). The pair temporarily crossed the 1.06 zone exactly a week ago. In the short term, it's likely to see another test of this area. If the resistance zone at 1.0613 is crossed, we could see an acceleration of buying pressure. This will heavily depend on the outcome of central bank meetings.