The recession is not here yet, but it is on everyone’s mind. In question, an ever stronger inflation and the prospect of an acceleration in the raising of interest rates. It is in this context that Antoine Lesné, head of research and strategy SPDR ETF Europe at State Street, presented this week his perception of the market for the coming months, starting with the “hot” subject of the price increase.
Inflation on a plateau but not coming down
For this bond market specialist, the sharp rise in inflation is the surprise of the start of the year. The pace of progress was, at the beginning of 2022, comparable to that of 2021 (already higher than normal) and even exceeded it after the start of the Russian military offensive in Ukraine, due to tensions over supplies (raw materials and energy). Antoine Lesné predicts that inflation will reach a plateau in the coming months without coming down. A resumption of price increases cannot be ruled out.
The risks associated with this inflation are multiple, starting with a rising wage-price loop. Currently, the impact seems limited on wages, explains Antoine Lesné, but this could change radically if prices reach levels that are not sustainable for current household incomes. He also points to the subject of unemployment, which remains robust (3.6% in the United States), but which could weaken in 2023, the macroeconomic risk being very high. The construction employment indicator in the United States will be an indicator to watch for a possible slowdown in the labor market.
Another subject of concern is the raising of key rates by central banks to initiate disinflation, which raises fears of a risk of economic recession. For the moment, Antoine Lesné enlightens us through various indicators which are not alarmist. The New York Fed Recession Index, which measures the likelihood of a recession in the United States, remains at much lower levels – between 5% and 10% this year – than in August 2020, when it reached almost 40% . Another indicator of recession is the rise in bond spreads, which, in Investment Grade and High Yield, have increased but have not yet peaked.
Significant impact on emerging markets and currencies
Emerging countries are affected by these interest rate hikes in the major world economies, especially since those initiated by their central banks in 2021 have not brought down the price of food and energy. , which continue to soar. Among these emerging markets, Russia is of particular concern because of a significant risk of default, as is Turkey, with inflation reaching record levels. The situation in China is another subject of concern because of the imposed confinements, but its economy should benefit from the depreciation of the yuan and from support from the Chinese Central Bank in the event of economic difficulties linked to health restrictions.
Finally, the impact on exchange rates is significant. Antoine Lesné specifies that “ some experts talk about reaching dollar-euro parity, even if officially they don’t say so “. The US currency is reassuring in this uncertain environment and is in massive demand, which is pushing the currency higher.