Inconclusive Powell
Nothing new was said during Powell’s testimony to Senate - recent readings have pointed to “modest further progress” on inflation – with more good data needed to strengthen confidence that 2% is in reach
- Lowering interest rates too little or too late could put the economy and labor market at risk….
- ….but at the same time cutting too much or too soon could stall the progress on inflation
- Powell’s remarks suggest no action by Fed at the end of July
- Traders now pricing 70% chance of a move in September and two cuts in 2024
US data - progress on inflation?
A solid US payrolls report with a deceleration in wages supports gradual progress on inflation
- Nonfarm payrolls rose in June by 206k (above estimates of 190k but down from 272k in May) • Unemployment rate rose to 4.1% (from 4.0%) with average hourly earnings cooling (3.9%, slowest advance in 3 years)
- More people entered labor force (participation rate rose to 62.6%)
- Previous two-month data was revised down by 111k • The data points to a slowing down of the labour force, which should be welcome news for the Fed • Next up US inflation numbers on Thursday – Core CPI for June expected to rise 0.2% m/m hinting to a disinflationary trend
Left, Center and Right
- Against all forecast, the far-right Rassemblement National (RN) ends up third with 143 seats
- Early polls pointed to a resounding victory, close to an absolute majority
- The big surprise came from the Nouveau Front Populaire (NFP), a broad coalition on the left • With 182 seats, the NFP was the (surprise) winner • Ensemble, President Macron’s coalition, came out second with 168 seats
- In light of this result, two scenarios are possible: • a minority government, exposed to a no-confidence vote • a technocratic government, with a broad coalition
- As new elections cannot be called before June 2025, the months ahead are going to be challenging
- Se far, equity markets have remained calm: equities are slightly up and the spread has gone from 80 to 62bps
Europe's economies under pressure
- German factory orders unexpectedly plummeted in May – the latest setback to the recovery in Europe’s largest economy. Demand dropped 1.6% from April — defying analyst estimates for a 0.5% increase. The result extends the slump to five months, highlighting the persistent struggles of German manufacturers.
- The IFO Business Climate of the German economy has surprisingly deteriorated further, making more calls for new government support for growth. The German economy is struggling to overcome stagnation.
- In addition, major political upheavals are underway that could also lead to uncertainty on the stock markets in Europe as the year progresses. These include the elections outcome in France, the shift to the right in the EU Parliament and in the Netherlands, the left-slip in UK as well as possible early elections in Germany.
- Conclusion: ECB should speed up lowering rates to support economies, but Lagarde says recently ECB needs more data to reassure it on inflation.
Commodities : constraints drive the upside
We see further signs for a price upside for commodities in the near future as the calculations for new mines have been based on the macro assumptions we experienced over the last 20-30 years: Low energy costs, historically low interest rates, relatively low labour and material costs, etc.. We are currently facing almost the opposite situation!
- ESG efforts will likely exacerbate the situation, creating one of the most constrained long-term supply dynamics in metals we have seen in history.
- The construction boom driven by onshoring, revamping the electric grid, new data centre developments, new industrial capabilities, and infrastructure developments are all poised to increase the long-term demand for these commodities.
- Finally the global average time to build a mine has increased to nearly 16 years.
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The analyses and forecasts contained in this publication are based on assumptions, estimates and hypothetical models which may prove to be incorrect and therefore lead to substantially different results.