(CercleFinance.com) – On Thursday March 9, analysts at CPR Asset Management held their traditional quarterly conference for investors. The experts took the opportunity to provide an overview of macroeconomic and financial news with a question in the background: is disinflation underway?
After zero growth in the 4th quarter in Europe, the business tendency surveys point to rather favorable prospects for the start of 2023, in particular thanks to a notable improvement in the services and industry sectors.
In Europe, inflation fell from 8.6% in January to 8.5% in February, a decline that is admittedly modest but which nevertheless signals a 4th consecutive month of contraction. Except that on closer inspection, we see that underlying inflation – i.e. the seasonally adjusted index which makes it possible to identify an underlying trend – continues to progress, going from 5.3 to 5.6%, with in particular a ‘very dynamic’ inflation of services.
In addition, the ECB estimates that wage negotiations have led to a 4.4% increase in wages in 2022 and 4.8% for 2023, levels that remain difficult to reconcile with the inflation targets displayed.
‘In this context, it is very likely that the ECB will reassess its rate hike strategy. Thus, the terminal rate is now seen to be close to 4% in the summer of 2023 and there is no longer an anticipated rate cut in 2023’, indicates CPR.
The ECB also began reducing its balance sheet in early March and no longer reinvests €15 billion in maturing securities each month.
Across the Atlantic, inflation is also holding up a little better than expected: in January, it stood at 6.4% – a 7th consecutive month of decline – a figure which nevertheless remains higher than expected and still miles from the target. 2%.
This trend caused a change in market expectations regarding the Fed’s monetary policy. The terminal rate has been revised upwards by around 50 bps and the scenarios for key rate cuts from 2023 have now been ruled out. The markets are even anticipating key rates above 5% until the 2nd quarter of 2024…
According to data presented by CPR, the contraction of US inflation should continue over the coming months, based in particular on the decline in energy prices and the decline in rents after their expected peak in the 1st quarter. .
Analysts finally report that global trade began to contract at the end of 2022 and that some indicators suggest that this decline is likely to worsen in the coming months.
US banks have also significantly tightened their credit conditions and demand for loans is falling. ‘Over the last 3 months, there has also been a contraction in bank loans to businesses, which is a harbinger of less economic growth to come’, say the experts.
In this context, CPR outlines three three-month market scenarios: the first (linked to a probability rate of 55%) is that of a soft landing for the economy, with a decline in inflation on both sides of the Atlantic. In this scenario, the ECB raises its rates by 50 bps in March and 25 bps in May, and the Fed by 25 bps in March and May. The big recession is avoided and the reopening of China is felt with a drop in long rates and disinflation well underway.
In the second scenario (30% probability), the markets fear that high inflation will be more persistent than expected and that this will cause central banks to be even more restrictive than what is ‘priced’ by the markets. The terminal rate is revised upwards (idea that the Fed will raise its key rates to 6%) . The markets are anticipating a deep recession, which is leading to a relapse in commodities.
Finally, the 3rd scenario (15% probability) sees activity starting to pick up again, thanks to the drop in energy prices and the reopening of China. Disinflation continues but the better performance of the economy means that the idea of key rate cuts in 2024 is dissipating. Finally, equity markets are rebounding as the risk of recession recedes and earnings prospects improve.
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