Too Many Good News?

The macro point

The year 2023 starts on a rather solid footing. More and more forecasters believe that a recession can be avoided in both the eurozone and the United States (the United Kingdom is a separate case). Recent statistics indicate a (modest but clear) improvement in the economic situation. The PMI activity indicator for the eurozone (covering both manufacturing and services sectors) is once again in expansion (above 50), at 50.2. This is a good surprise. The improvement in activity is currently mainly driven by the services sector (maintenance of consumption and decrease in inflation). But the manufacturing sector is also recovering. The index rose to 48.8 compared to 47.8 in December. What is most surprising is that industrialists are maintaining their investment forecasts. They will continue to invest in automation, even if growth slows down. This is a way to counter the lack of qualified labor. But it is also a sign that they consider the downturn in activity to be only temporary. Not all uncertainties have been lifted (return of rising energy prices by the end of the year, the scope of Chinese stimulus which is still uncertain, etc.). However, it must be acknowledged that the economy is doing well. An excellent journalist from the newspaper La Croix, Marie Dancer, speaks of a "strange economy" to describe the current period – everyone expected the worst but the microeconomic reality is that it's holding together and most sectors are resilient.

It’s roughly the same in the United States. Last week, investment bank Goldman Sachs drastically revised its growth forecast for the world's largest economy. The talk is no longer of recession but rather sluggish growth. This is a notable change. Again, the PMI activity indicators are well oriented. The services sector is seeing a rebound (index rising from 44.7 in December to 45.0 in January) while the manufacturing sector is almost stable (at 46.8). A soft landing is now the central scenario for the consensus. This aligns with our expectations formulated at the end of 2022. We doubted the probability of a recession across the Atlantic.

A little further north, the Bank of Canada (BoC) made a major decision last week (which could directly impact the decision of the US Federal Reserve this week). It is the first central bank of a G7 country to formally announce the end of the monetary tightening cycle. The terminal rate is therefore set at 4.5% after a final increase of 25 basis points. Since the beginning of the inflation cycle, the BoC has consistently been a bit ahead in terms of monetary policy compared to the US central bank. Therefore, it is just a step for traders to consider that there will be a pause in the rate hike process in the United States. At Mondial Change, we think there is still room for at least two interest rate hikes of 25 basis points each (the next one taking place this week, on February 1st). In the eurozone, the debate is probably a little different since inflation is still very high and not receding sufficiently to discuss the possibility of a pause. Patience will be needed. In any case, the BoC's decision combined with the expectations of a future pause from the US central bank are rather favorable to risk appetite in the foreign exchange market (and, consequently, unfavorable to the US dollar which remains weak at the beginning of the year).

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 as a basis or considered as an inducement to engage in any investment.