The most heralded recession in history is struggling to show up. The activity indicators published for February in Europe and the United States turned out to be better than expected thanks to the dynamism in the services sector. In general, demand remains weak, impacted by inflation and deteriorating financial conditions. However, improved supply chains are leading to a reduction in order books, which supports employment and wage pressures.
In detail, in the United States, the stabilization of growth is confirmed. The composite PMI rebounds above 50 (economic expansion zone), an eight-month high, thanks to the services sector. The manufacturing sector is also rebounding but still remains in contraction territory (47.8 versus 46.9 the previous month). Surveys point to falling inflationary pressures, such as the lowest in input prices since October 2020. However, this trend is, in part, offset by the continued rise in wages, which keeps the pressure on prices charged to customers who remain on high points. In the euro area, after returning to expansion last month, growth accelerated in February. Here too, activity in services is the most dynamic, driven in particular by financial services and the recovery in tourism. The two main drivers of the zone, France and Germany, are returning to the expansion phase but remain behind all other members. Finally, it should be noted that the dynamic is identical in the United Kingdom, where activity indicators have surprised positively, again driven by services.
These data would therefore corroborate the new market scenario of a "no landing" (after the debates between the proponents of a "hard landing" and those of a "soft landing"). On the other side of this renewed growth, the decline in inflation could therefore take longer than expected, which, in the words of Janet Yellen, will not be "in a straight line". As such, the publication last Friday of PCE inflation above expectations, both monthly and annual, confirmed these fears.
These releases echo the Fed's final minutes, released last week, which revealed that several FOMC members were concerned about the recent rate cut and easing monetary conditions while inflation they said remained high. A pause in the rise in key rates does not seem to be on the agenda either, while some members were even pushing for a 50 bps increase at the last meeting. These elements confirm, in our view, that policy rates are likely to remain high longer than the market still anticipates, even if expectations for the Fed's terminal rate have been revised upwards by 25 bps over the week. One More Time...