Thomas Hempell (Generali Investments) | The summer revealed a diverse and difficult global macroeconomic context. Strong US data raised fears that US rates will remain high for longer. China is concerned about the real estate sector and growth. and The eurozone faces a deepening political dilemma as persistent inflation is at odds with growing risks of recession..
The ECB’s political problem has become increasingly apparent. High wage growth in the eurozone points to continued pressure on service prices, where labor represents a high proportion of input costs. Rejecting post-pandemic inflationary excesses for a long time, The ECB will try not to blink prematurely on inflation. But activity indicators fell, and the latest PMI, Ifo and ESI indices exceeded expectations, were moderate, and pointed to a contraction in the third quarter), raising fears of a – recession.
With most of the previous rate hikes working through the economy and declining commodity inflation, the most posture dovish The ECB has several arguments to avoid a September hike as more data comes in – The September 14th stop in the ECB cycle now looks more likely for us (in an admittedly tight call), as it did for the Fed on September 20th.
This, along with further weakness in economic data, points to a moderate yield reduction. However, the continued hawkish bias in the communications from the Federal Reserve and the ECB (which does not rule out further increases and rejects hopes of an early change) is likely to prevent a stronger- on rally in chains.
We continue to wait new headwinds for higher risk assets, especially equities and subprime assets, while the safer IG credit can extend its resistance and benefit from attractive carry. The chances of a recession in the eurozone have increased. The recovery of real income will help to stabilize the activity at the end of the year. But further deterioration in the global outlook and the impact of rapid monetary tightening could keep the euro zone on the hook though. In China, the rapid completion of reopening and growing real estate problems could undermine confidence and growth, which would also damage the prospects of European exporters.
Pressure on margins and high valuations are a drag
This does not bode well for earnings prospects, especially in the eurozone, as margins come under pressure from higher labor costs, which will undermine excess consumer savings and sluggish global demand. Stock valuations also remain high. The PER of the S&P 500 is almost 19 times, a level similar to April 2022. During that time, real 10-year yields in the US approached zero, while at the end of August they were close to 2%. Finally, the risk position of investors also appears strong. The recovery of confidence from the low levels seen during the banking problems in March underpinned much of the rally in equities earlier in the summer, but has recently become a bit of a drag. The weak development of the eurozone, the forecast of a mild recession in the US and the change of the Federal Reserve, expected later, will make new headwind for the euro/dollar before it can resume its climb at the end of the year.
