As the IMF shows in its growth projections in its "World Economic Outlook April 2022", the war in Ukraine with its inflationary effects on energy and food products has as expected a significant impact on the slowdown in global growth for 2022 and on the forecast for 2023. Global growth is expected to decline from 6.1% in 2021 to 3.6% in 2022 and 2023. This represents 0.8 and 0.2 percentage points lower for 2022 and 2023 than forecast in January. The “zero Covid” policy in China is moreover not likely to reduce tensions on supply chains, the current pressure is reinforced by the Ukrainian crisis on the cost of inputs. The publication of corporate results in the United States (nearly 180 S&P 500 companies will publish their results this week, including the technology giants Apple, Google, Microsoft, Amazon) and in Europe (Air Liquide, Dassault Systèmes, Unilever , UBS, …) will be interesting to follow in this respect.
IIn this context, the hawkish position of Jerome Powell, who as we recall last Thursday that a 50 basis point hike in the Fed Funds rate target would be "on the table" at the May 3-4 FOMC , clearly raises the question of the FED's ability to ensure a "soft landing". Indeed, monetary tightening in the United States is proving to be increasingly firm in the fight against inflation, the peak of which is (it must be admitted) to be expected. At the start of the year, the FED was leaning towards raising the Fed Funds rate by increments of 25 basis points. However, the members of the FOMC (from John Williams (FED in New York), via Charles Evans (FED in Chicago) and Jerome Powell himself) began to favor a step of 50 basis points. Recall that James Bullard (FED of St. Louis), which not surprisingly, even raised the question of a rise of 75 basis points (this would be a first since November 1994). By way of illustration, note that the confidence of home builders in the USA fell again in April (-2pts), for the fourth month in a row. The trend on the NAHB index shows that the conditions for home ownership are deteriorating due to high prices and rising borrowing rates.
IIn Europe, while Christine Lagarde has declared that a rate hike was likely before the end of the year, the path seems less clear (only the end of the asset purchase program is legible at this stage with discussions on a rise in interest rates during the summer) and still too much of a “dove” approach. Mrs. Lagarde must indeed find an appropriate pace of monetary normalization (difficult exercise) so as not to weaken the peripheral countries whose rising yields on government bonds are already marking the fears of the markets. The President of the ECB even called the institution's officials to order, asking them to avoid expressing divergent personal opinions on monetary policy decisions during the days following the monetary meetings. Unsurprisingly, Emmanuel Macron's victory will reassure the markets about the stability of the European project, even if this theme is put in the background compared to those of inflation and the risk of impact on growth (aggravated by the war in Ukraine).
Publications of preliminary data on first quarter growth in the USA and in the euro zone (expected this Thursday) as well as those on inflation (consumer expenditure index in the USA expected on Friday, which constitutes a veritable guide from the FED in terms of inflation) will be to follow this week. The "soft landing" of the American economy, with the need to take increasingly strong measures to curb galloping inflation, is indeed likely to be harder to control than expected and the data on growth in the USA and inflation will be the focus of attention this week. The FED's "soft landing" scenario expects inflation to drop from 7% in 2022 to 3% in 2023. However, nothing is less certain. The alternative to calming prices, reminiscent of the early 80s, is that of a recession… but we are not there yet. It therefore remains to trust the pilot (hoping that there will be no error in monetary policy, since excessive monetary tightening could prove to be destructive of growth, and moreover be useless in the face of an inflation shock caused by a shock of offer). In the short term, the market will remain stressed by the rise in 10-year bond yields and its impact on growth stocks.
