The weeks go by and inflation, already at record levels, shows no signs of calm, forcing the central banks to close the floodgates more quickly, at the risk of a hard landing (see our last meeting Monday).
On the American side, the Fed should record this week, during its monetary policy meeting a new increase in its key rates by 50 bps this time. All the macroeconomic data published last week does not in fact, argue for a change of discourse. The publication of the PCE inflation rate, the central bank's preference indicator, thus continued to accelerate in April to 6.6% at an annualized rate against 6.4% the previous month. The core index, excluding volatile elements, was however almost stable at 5.2%, down 0.1% over the month. These figures have accentuated fears of too violent a monetary tightening which would have too strong an impact on growth, as the latter came out of contraction territory for the first quarter of this year. However, if the publication, prima facie, at -0.4% in quarterly variation of the American growth (-1.4% in annualized against +1% anticipated) marks a clear slowdown compared to the last quarter (+6.9% in annualized). A closer look at the components shows a more resilient picture of the US economy. Indeed, GDP was mainly impacted by a booming trade deficit (-3.2 pts), aimed at rebuilding stocks of consumer goods, as well as by the drop in public spending. At the same time, consumption continues to hold up well, with, for example, a further increase in consumer spending in April (+1.1% against +0.6% expected and +0.6% the previous month), despite the high inflation on almost all goods.
IIn Europe, the ECB is facing the same inflationary problem, particularly in Germany where inflation increased in April (+7.4% against +7.3% the previous month). In Spain too, inflation remains at a very high level, albeit down (8.4% in April against 9.8% in March) but with a sharp rise in core inflation (+4.4% in April against +3.4% in March). Under these conditions, and with energy prices unlikely to fall again with the Ukrainian conflict, the ECB should accelerate the pace of its tightening with a first increase in key rates expected from July.
Overall, according to a study by Bloomberg, the balance sheets of the main central banks should contract by 410 billion dollars this year against an increase of 2,800 billion last year and more than 8,000 billion since the Covid crisis. Closing the cash tap will therefore be brutal. Let's hope that the piping holds! At the same time, China continues to pay the price for its zero-covid strategy with official PMIs largely in contraction phase forcing the government to backpedal on some of the “consolidation” measures put in place to revive the economy, especially with the Communist Party Congress at the end of the year, Xi Jinping will have to avoid being too far from his growth target of 5.5%.