Fears of a recession are fading fast in the eurozone. The region’s purchasing managers’ index was up by more than expected in February, hitting a nine-month high, thanks in particular to an uptick in new orders. The consensus on the region has been overly negative, so we should continue to see forecasts being upgraded.
The latest macroeconomic data from the UK have been surprisingly strong, with an unexpected rise in retail sales and a stronger-than-forecast rebound in consumer confidence. It’s worth noting, however, that consumers won’t start to benefit from the decline in natural gas prices until September. In the meantime, the UK’s recession may not be as strong as initially feared.
Chinese markets stalled in February after rallying since November. Investors’ enthusiasm about China’s reopening has been curbed recently by fears of a global economic slowdown and balloon-related geopolitical tensions. But lending growth has remained solid and there are early signs that the property market is picking up again. We therefore remain optimistic despite the recent profit-taking.
Europe – the stars are finally aligned for banks
The US dollar has gained strength against most currencies since early February. That’s not surprising, as it lost a lot of ground from last autumn onwards. The decline was particularly strong against the euro, and investors’ confidence in the greenback tumbled at the same time.
For the moment, it’s too early to tell whether the current uptick is a technical rebound from oversold levels or a fresh bull run for the greenback. It’s worth pointing out that US economic data were surprisingly robust in February, supporting our forecast that the US economy will make a soft landing before picking up in the second half of the year.
The data show that US output is holding up well despite the global slowdown, the war in Ukraine and the US Federal Reserve’s monetary policy tightening. In these circumstances, investors are expecting more rate hikes in the US, especially since inflation isn’t easing as quickly as hoped. Despite this, we think that the dollar’s current rally will be short-lived. The Fed will almost certainly be one of the first central banks to stop raising rates.
In fact, the European Central Bank, which is grappling with a much higher rate of inflation than in the US, will be tempted to keep normalising its monetary policy long after the Fed has ended this round of tightening, particularly since eurozone output has held up fairly well despite the war in Ukraine and the fears of an energy shortage this winter.
What’s more, many indicators suggest that the dollar is overpriced against most currencies. In terms of purchasing power parity, in particular, the dollar is currently overpriced by more than 7% against the euro, and by slightly less against the Swiss franc. We therefore still think that, after the dollar’s sharp rise between January 2021 and September 2022, other currencies will now rise to the top. The euro could well be one of them, but commodity-linked and emerging currencies may gain even more ground.
US inflation is back in the spotlight
The S&P 500 was down more than 2.6% last week, its worst weekly performance since December. While investors seemed to have shifted their focus away from inflation at the start of the year, the latest economic data are a reminder that consumer price growth is far from normal levels.
After stronger-than-forecast inflation in January, now it’s the GDP price deflator – another measure of the prices of goods and services – that came in higher than expected. These indicators show that the US economy is still robust, perhaps even a little too robust for the Fed’s liking – the Fed will probably harden its stance at its 22 March meeting, particularly since the labour market, which Jerome Powell and his colleagues have been watching closely, is still very firm.
So it’s not surprising that the markets have taken a breather after the sharp January rally. Technically speaking, this consolidation is a healthy one and doesn’t undermine our forecast for a fresh bull run for US equities. While the latest data are clearly disappointing, they don’t affect our constructive stance on the US stock market. Inflation is set to return to normal in 2023, and any disappointments along the way will be an opportunity for investors to buy up US risk assets.
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
