Optimism on all fronts

In contrast to the previous week, when inflation figures came in well below expectations, the markets are once again believing in the victory of monetary policy’s demiurges over public enemy number one: inflation.
In the United States, core inflation is rising at its slowest pace since the end of confinement.
There is no devil hidden in the details of this publication: everything points to a genuine deceleration in prices. The only downside is that the base effect will be less favourable for future releases.

The same is true of the world’s second largest economy. In June, China’s consumer price index posted zero annualised growth, the lowest since February 2021. The fall in energy and core components more than offset the rebound in pork prices (which currently account for 1.5% of the index). Above all, producer prices are down sharply (by more than 5%!).

After six months of clear underperformance, the industrial metals markets have stabilised over the past week. Iron ore, an essential component of steel production, weakened by inelastic production and a fall in building permits and new projects in China, has suddenly managed to move away from the symbolic threshold of 100 dollars a tonne. Copper, which has held up better due to low inventories, its use in the construction completion phase and electrification needs, is approaching $8700 on the London Metal Exchange. Aluminium has risen by 6% in a week. Overall, industrial metals posted their strongest weekly gain for 6 months, accompanied by oil, up 9% in July.

Seen by investors as a hedge against inflation, it is perhaps surprising to see the asset class respond positively to the downturn. In fact, in addition to expectations of a stimulus package shortly to be announced by the Chinese Politburo, commodities are benefiting both from the Dollar Index dropping below the symbolic level of 100 for the first time this year and from the appetite for risk that this instant fall illustrates.

Now inclined to think that the Fed’s mission has been accomplished, the markets are revising their rate hike expectations downwards, tempering the greenback’s bullish rally. The optimism is spreading from global equities (flows are accelerating: 570 billion in 7 weeks according to Bank of America), to credit (the investment grade default risk insurance premium is at its lowest since February 2022) and even to Ukrainian sovereign bonds, which are showing the first signs of renewed interest since the start of the conflict.

Victory against inflation, soft landing, end of the war in Ukraine… The markets, and technology stocks in particular, are once again focusing on the positive, unperturbed by the USD 100 billion or so that the Fed and ECB alone are withdrawing from global liquidity every month. The prospect of this economic cycle ending in a 2008-2009 type shock is receding. The intensity of the shock could be less than that of the decline in 2001-2002, a recession that ultimately had little impact on European consumers. The buoyancy of the labour market is supporting household confidence. So, too, is the largesse of the welfare state, perhaps at the cost of a moral hazard that it is time to correct, at the risk of leading to a disappointing future (in terms of debt repayment!). The recent warning from the Minister for Action and Public Accounts is no stranger to this. France is not alone: at 225 trillion dollars, world debt is at an all-time high.

Thomas Planell, Portfolio manager – analyst at DNCA. This article was finalised in July 14th, 2023.

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