Weekly Update - Spotlight turns again to central banks
Spotlight turns again to central banks Financial markets have regained a sense of calm following the turbulence triggered by the surprise announcement of elections in France. Market concerns have shifted back to the central banks, with a more subdued tone than expected from the Bank of England (BoE) and the Swiss National Bank (SNB). Calmer markets, but French markets remain cautious. French markets remain cautious following a period of tension marked by a significant drop in the stock market (-4,7% since June 7, +3,9% year-to-date) and a widening of the 10-year French yield spread against the German yield (+23 basis points over two weeks). Tensions have eased somewhat since the beginning of the week, but indices have not yet regained their pre-European election levels. It is worth noting that global equity markets have posted strong gains since the beginning of the year, up more than 12% (over 15% in the US, over 10% in the eurozone, 9% in the UK, all in local currencies). This context confirms our decision to maintain our overweight stance on developed market equities, while maintaining a diversified allocation to weather potential ongoing turbulence. BoE holds steady, but a shift may be soon. The Bank of England kept its policy rate unchanged at 5.25%, in line with expectations. As at the previous meeting, 7 members of the Monetary Policy Committee voted in favor of maintaining the rate, while 2 voted for a cut. The decline in May inflation has not fully eased concerns about inflationary pressures (inflation at 2% year-over-year and underlying inflation at 3.5%). However, the BoE signaled that it could soon move to cut rates, indicating a re-assessment of the situation in August, when it will update its forecasts. Markets are now expecting two rate cuts by the end of the year, with the first potentially coming as soon as August. Swiss National Bank surprises with another rate cut. The Swiss National Bank cut its policy rate by 25 basis points to 1.25%, surprising consensus expectations. Inflation continues to moderate and is below the SNB's target and significantly below that of its European neighbors (headline inflation at 1.4% year-over-year and core inflation at 1.2% in May). The SNB has slightly lowered its inflation forecasts to +1.3% in 2024, +1.1% in 2025 and +1% in 2026. The central bank considers its current monetary policy stance to be appropriate, justifying a continuation of its monetary easing cycle. Political uncertainties in France could contribute to an appreciation of the Swiss franc as a safe haven. The SNB's decision to cut rates should therefore help limit demand for the Swiss franc. Markets now expect two more rate cuts by the end of the year. |
In the highlights of the week, we chose to talk about economic activity in the Euro area as well as the european excessive deficit procedure:
The composite PMI index in the euro area was weaker than expected, dropping to 50.8 vs. 52.5 expected. The trend was similar in the main countries, particularly in Germany, where the manufacturing activity index contracted sharply, to 43.4 vs. 46.4 expected. In France, all sectors contracted, with service sector activity declining further to 48.8 vs. 50 expected, and industrial activity to 45.3 vs. 46.8. Below 50, the PMIs signal that the activity of the sector (or the economy as a whole) is in contraction. However, this indicator has, over the past few years, pointed to weaker growth than actually observed.
The European Commission launched a procedure for excessive public deficit against France and 6 other European countries, mostly because their deficits remain above the 3% of annual GDP criteria (5.5% in France in 2023). The procedure is due to be officialised on 16 July (meeting of the euro area ministers of finance) and will require these countries to take measures to bring their deficits down. For France, this adds up to the recent downgrade by rating agencies and the political uncertainty climate.
By Clémentine Gallès Chief Economist and Strategist Societe Generale Private Banking, Yvan Mamalet Economist and...
By Clémentine Gallès Chief Economist and Strategist Societe Generale Private Banking, Yvan Mamalet Economist and...
By Clémentine Gallès Chief Economist and Strategist Societe Generale Private Banking, Yvan Mamalet Economist and...
By Clémentine Gallès Chief Economist and Strategist Societe Generale Private Banking, Yvan Mamalet Economist and...
By Clémentine Gallès Chief Economist and Strategist Societe Generale Private Banking, Yvan Mamalet Economist and...