The signals are increasingly clear: economic activity is deteriorating on both sides of the Atlantic. In the United States, the real estate market continues to slow down with a sharp drop in house prices (-1.3% month-on-month). US growth surprised on the upside (+2.6% vs +2.4% expected) but the detail is not reassuring for all that. The reduction in disruptions in supply chains hides weaker consumer spending (+1.4% vs. +2.0% in Q2). In Europe, the context is no better and a recession in the euro zone seems more and more inevitable in view of the latest PMI indicators, which show a strong contraction. The German PMI thus fell to 44.1 against 45.7 in September, the lowest level since May 2020, when the country was in full confinement. Central banks seem (finally?) to take these warning signs into account, like the Bank of Canada, which has chosen to moderate the pace of its monetary tightening (only 50bp). For its part, the ECB once again drastically raised its key rates (+75bp), as expected, but the communication was considered more cautious. The institution thus avoided addressing the subject of the reduction in the size of the balance sheet and replaced the reference to “several” new rate hikes in the coming months with “more”. The exercise remains very difficult for the ECB, especially since the shortage of high-quality liquid assets (short-term government bonds) hinders the proper functioning of the interbank market, where these securities serve as collateral. The decision to modify the terms of the operations of TLTRO III, deemed too permissive, should help free up a number of these titles.
IIn any case, these signals reassured investors, who were once again quick to anticipate a paradigm shift, fueling a sharp drop in sovereign yields over the week and a return to risk appetite. It should be noted, moreover, that the month of October marked a good increase in the equity markets of developed countries, almost reminiscent of the month of July. Beware, however, of a false start in terms of the “dovish pivot”. For example, on Friday, the market was called to order and the pressure on rates was violent (+14 bp on the German 10-year rate). Inflation figures by State in the euro zone are not weakening and, in the United States, the underlying PCE inflation rate is even accelerating (+5.1% year-on-year compared to +4.9% in August) under the boost from household consumption, which is still drawing on their accumulated savings.
At this stage, if the "dovish pivot" seems to be getting closer, it is not yet acquired! Indeed, despite the onset of recession, the signals calling for a continuation of the monetary tightening cycle have not yet dissipated and encourage us to remain cautious. The reduction of political risk in Italy and the United Kingdom brings more visibility and the last weeks of the year are usually favorable to the markets, but this is not always the case and 2022 could again be an exception like in… 2018 ... (Halloween being conducive to scary stories). We will therefore be closely following the meetings of the central banks this week (Fed and BoE) as well as the continuation of the earnings season, which is moreover quite mixed for the moment. Revenue growth is generally disappointing and more and more companies are warning of growing pressure on costs.
