The Tightrope Economy

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The macro point

The global economy is at a crossroads. Uncertainty is high regarding both the trajectory of rates and growth. Unsurprisingly, risk appetite is at its lowest. Since the summer, there has been a retreat to the US dollar, which intensified last week. Without a crystal ball, currency traders are prioritizing caution. We expect this situation to last at least until the next Fed meeting scheduled for November 1st. We hope that on this occasion, the market will have more visibility regarding monetary policy. The pessimists who have been predicting a recession in the United States since 2022 have been wrong so far. The US Federal Reserve (Fed) has even revised its growth forecasts for 2024 upwards following its September meeting. The optimists who thought the post-Covid period would mean abundant growth must reconsider their scenario in light of the current slowdown. The global economy is walking a tightrope. The evolution of the coming months will essentially depend on three factors: (1) China's ability to restore its citizens' lost confidence; (2) the shift from a neutral fiscal policy in the eurozone to an expansionary fiscal policy, and finally (3) the evolution of consumption in the United States. We doubt China's ability to tackle the economic slowdown challenge. It's not a question of money. In theory, the central government can inject as much liquidity as necessary. The problem is that even billions of yuan will not suffice to restore household confidence, which is at its lowest due to the collapse of the real estate sector. It's worth noting that 60% of Chinese household wealth is linked to real estate. In the current context, it's quite legitimate for households to prefer saving over consuming. The crisis is severe. Chinese savings represent 45% of GDP compared to about 18% of GDP in France (knowing that before Covid, it was closer to 14-15% of GDP). Given that the stabilization of the real estate sector will take several years, we must rule out the possibility of a quick restart of the Chinese economy. This is the first piece of bad news. The second piece of bad news is that fiscal policy is neutral in the eurozone. This means it does not support economic growth. Yet, it's needed, knowing that the eurozone is on the brink of technical recession (two consecutive quarters of GDP contraction). The latest PMI activity indicators for services and manufacturing leave little hope in the short term. It's likely that economic activity will contract in the fourth quarter. Unfortunately, European states do not seem inclined to consider targeted and coordinated support policies. Here and there, debates are starting about the opportunity to support the economy, as in Germany. But no concrete measures seem to be planned in the short term. The eurozone is certainly doomed to enter stagflation. The last piece of bad news is not really bad. The US economy shows signs of fatigue due to the American consumer. Last week, consumer confidence published by the Conference Board fell to a four-month low in September. Rising interest rates, soaring gas prices, and the resumption of student loan payments this month weigh on American households. According to a study published by Jefferies on more than 600 Americans with student loan repayments, about 90% of them indicate concern about their ability to meet their total monthly expenses. Half of them are even "very" concerned. If the consumer falters this quarter, a contraction in activity is likely. However, a recession seems excluded (this is the good news of the week). The Fed has not considered this scenario since last July 26th, and, subsequently, most market participants have aligned and opted for the hypothesis of a soft landing (or smooth landing of the American economy). At this stage, however, there are two points of uncertainty: (1) how monetary policy will evolve in this complicated context (how long the rate pause will last and when the first reduction will occur) and (2) what the growth rate in 2024 will be. It will certainly be necessary to wait for the Fed meeting on November 1st to have a clearer view, at least regarding the trajectory of the rates.

Technical point

In the foreign exchange market, the dollar remains the safe bet for traders. This is not a surprise considering the economic landscape we have just outlined. This implies that the EUR/USD still has significant downside potential. Over the past week, the pair fell by 0.92%, hovering around the area located at 1.05. The Institute of International Finance, which is highly respected for its Forex forecasts, anticipates that the euro will drop below parity. This is complicated in the short term, in our opinion. For this to occur, the eurozone would need to experience a deep recession, which is no one's scenario at this stage. The euro should also continue to lose ground against the Canadian dollar. The currency of Canada is supported by the continued rise in oil prices (+38% in three months). Everything indicates that the oil market will continue on an upward trajectory by the end of the year. According to Bloomberg projections, three million additional barrels per day would be needed for the market to return to balance. Finally, a word about emerging currencies (since we have expanded our foreign exchange coverage in recent months). The good surprise of 2023 is that Latin American currencies are performing quite well. A few years ago, Latin American countries experienced rampant inflation and were sometimes forced to make costly devaluations. This is no longer the case. The Colombian peso, for example, is up 20% against the US dollar and 16% against the euro. Great performance! The supports and resistances displayed below indicate the low and high points within which the rates should evolve during the week.

Announcements to follow

At the macroeconomic level, the week ahead will be dominated by US employment. The midweek ADP survey is of little interest. It is a statistic that only imperfectly reflects the real state of the labor market across the Atlantic. It is therefore also a poor leading indicator of the NFP (Non-Farm Payroll) survey by the Department of Labor. Let us recall that the Fed needs a marked slowdown in the labor market to definitively end the rate hike cycle. In this regard, the August indicators are encouraging: the unemployment rate rose to 3.8% from 3.5% in July, and job creations fell to only 187,000 from an average of around 400,000 in the period immediately following the Covid lockdowns. The Fed hopes the trend will be confirmed with the September figures to be released this Friday at 2:30 PM. Logically, with the gradual disappearance of the Covid-related savings surplus, more and more Americans should return to the labor market, which should lead to an increase in the unemployment rate. This is the phenomenon observed last July. Below you will find the publications and events that should have a major impact on the evolution of currency rates.

Day	Time	Country	Indicator	What to expect?
10/02/2023	16:00	USA	ISM Manufacturing Index (September)	Previous in contraction at 47.2.
10/04/2023	14:15	USA	ADP Private Employment Survey (September)	Previous at 177K. It is now considered a poor barometer of the US labor market. Its release causes little market movement.
10/06/2023	14:30	USA	Department of Labor Employment Report (September)	The pace of job creation has fallen to 200,000. This is respectable given the economic cycle. But a more pronounced slowdown could force the Fed to ease its monetary policy. To watch.