US inflation accelerated in August after oil prices jumped by over 10% month on month. However, core inflation, which excludes volatile energy and food prices, slowed further. It fell to an annual rate of 4.3%, down from its high of 6.6% in September 2022.
Rising interest rates continue to weigh on gold prices, and investor sentiment on the metal is now extremely bearish. A more dovish tone from central banks, along with a drop in bond yields, could help gold to regain some momentum.
Buoyed by solid fundamentals, oil prices have again risen, gaining more than 10% since the start of the year. Although investor sentiment is once again riding high, prices are not yet weighing on the economy. This trend is therefore likely to remain in place in the short term.
European Central Bank – one for the road?
In the run-up to the ECB’s meeting last week, economists and investors were quite evenly split between those who expected rates to remain unchanged and those who expected another hike. In the end – and presumably because of the recent rise in oil prices, which could push up inflation in the eurozone – the ECB decided to raise rates again, taking the deposit rate to 4%. However, ECB President Christine Lagarde unexpectedly signalled that the ECB was probably done with its tightening but that rates are likely to remain high for some time. It sounds like Ms Lagarde doesn’t think rates should be cut any time soon. This message seems to be the result of a tough compromise within the ECB’s Executive Board. The hawks – those in favour of prioritising the fight against inflation – seem to have got the additional hike they were after as a way of keeping a lid on inflationary pressures, particularly as we head into a new period of wage negotiations in both the public and the private sectors. At the same time, the doves – the members more concerned about supporting growth – have managed to get the message out that the period of monetary policy tightening is probably over.
We think this is a coherent and reasonable compromise. It’s true that inflation in Europe is still a long way from the ECB’s 2% target and probably won’t get there until 2024 at the earliest. But the recent weakness in the main economic indicators justifies this caution, especially as the economic outlook for Germany – the heavyweight of the eurozone economy – has worsened.
The announcement is good news for the financial markets. With the world’s two main central banks taking a break from their tightening, the uncertainty surrounding monetary policy is beginning to fade. As a result, long-term bond yields are unlikely to rise much further. What’s more, the possibility of a new economic cycle, with a recovery expected as early as 2024, will be a boon for the stock markets.
Germany – the DAX is faring better than the economy
As the bad economic news piles up, Germany has been in the headlines recently, but not for the right reasons. Its economy is heavily focused on exports and manufacturing, which are usually drivers of growth. But the country is now bearing the brunt of weak international demand, particularly from the US and China, two key partners for Germany. In addition, inventories are taking longer than expected to return to normal, and rising interest rates have hurt manufacturing confidence. On top of that, natural gas isn’t cheap, which is particularly problematic for energy-intensive sectors. All of this means it’s going to be hard for the country to avoid a recession in 2023, but in our view this is already reflected in consensus forecasts. In a few months’ time, manufacturing will pick up again and inflation will slow, which will boost consumer spending. However, it will take some time before Germany regains its position as a driver of the eurozone economy, as the previous government failed to invest enough in forward-looking sectors like digitalisation and infrastructure.
It may seem counter-intuitive, but despite this lacklustre economic environment, the DAX index has risen by almost 14% since the start of the year, outperforming the eurozone stock market as a whole. This is because industrials, techs and automotive stocks, which have gained between 10% and 20% this year, make up around half of the index, while energy and commodities account for only a small weighting. We think the German index could continue to perform well, given that only 30% of its constituent companies’ revenues are generated in the eurozone. This means that the DAX is not actually all that representative of the broader German economy.
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.
