The economic indicators published the previous week reminded us: Europe is not out of the woods with inflation. In the United Kingdom, the rise in prices is not slowing and is even accelerating beyond expectations (+10.1% year-on-year against +9.8% expected and +9.4% in June). The rise in wages is notable (+5.2% year-on-year) but will not compensate for the loss of purchasing power of households, which are expected to reduce their consumption in the coming quarters. Because while retail sales resisted in July (+0.3% in monthly variation), they are still on a downward trend (-3.3% year-on-year). In Germany, the signal is also worrying with producer prices rising sharply at +5.3% month-on-month against +0.7% expected and 0.6% in June. Behind this historical high point, the energy shock which is currently hitting Europe and which is not about to subside. In fact, there are many tensions around the price of energy (especially gas and electricity) between the difficulties encountered by European producers (maintenance of nuclear power plants, drought limiting water reserves for hydroelectricity, etc.) and Russia, which voluntarily limits the supply in order to force the replenishment of stocks for the winter.
A few days before the Jackson Hole symposium, these two price statistics remind us that the fight against inflation will be long. Several members of the Fed also reiterated that it was still far too early to claim victory, despite the dip observed in the last publication of the US CPI rate for July. On both sides of the Atlantic, central banks will therefore have to stay the course of monetary tightening and continue raising key rates, even if it means going through a phase of recession. After this brief period of summer enthusiasm during which investors bought the “FED pivot”, the markets are confronting the reality of a monetary policy that will be durably restrictive. The equity markets thus fell this week, although the movement remained limited compared to the scale of the rise in sovereign rates. These have indeed soared with German and US 10-year sovereign yields gaining 24 and 15 basis points respectively over the week. At the same time, fears about the resilience of the economic cycle continue to weigh on credit spreads, with the crossover index widening by 62 basis points.
As we mentioned during our previous "Monday meetings", it seems to us that investors had excessively optimistic expectations regarding the relapse of inflation and the possibility of curbing monetary tightening. If in 2021, J.Powell's speech in Jackson Hole warned of the risks of a premature tightening, it seems to us very unlikely given the context, that this year's speech will have a "dovish" character. Consequently, we remain cautious and have, as announced the previous week, tactically reduced our exposure to equities and particularly to growth stocks.
