By DNCA Finance
The ECB is not sparing the markets’ nerves at a time when volatility seems to be making a comeback.
As expected, status quo on rates in July.
But some doubts raised just after Christine Lagarde’s latest intervention suggest that the institution is not entirely comfortable with a further cut this year. Markets revised their expectations slightly in September, and now anticipate an 83% probability of ECB action.
Overall, inflation slowed in June, but remains strong in services.
The reason? Full employment in Europe: only 6.4% unemployment (the lowest since the creation of the single currency), accompanied by a rise in the participation rate.
The upturn in real wages remains intact (negotiated wage growth came out at +4.7% in the first quarter). This is good news for domestic consumption. But it is also fuelling inflation in services (+4.1% in June), where the weight of the wage bill is predominant. A few signs of deceleration are emerging here and there. Job openings are beginning to slow. Companies are benefiting from a less tense environment when looking to recruit. Some of them are beginning to absorb wage inflation into their margins rather than passing it on to the economy: this is a relief for Christine Lagarde, but the trend needs to be confirmed. The ECB is therefore approaching the second half of the year with the utmost caution. Attentive to the data, it is keeping a close eye on the actions of the FED, which Trump is warning not to cut rates too quickly in September, as he certainly fears this would give his rival an advantage.
Having miraculously escaped death, “Reborn Trump”, now shrouded in a martyr’s mystique, is galvanizing his electoral base. Touched by the grace of a new “manifest destiny”, the Republican party seems to profess its faith in the doctrine of “national conservatism” of the presidential ticket, led by an ex-President who enjoys the popularity of a warlord and the vindictive Senator Vance. For the febrile Democratic Party, weakened by the questioning of its leadership, the risk of losing the White House and both chambers is real: the hardest part of the crisis is probably yet to come.
Meanwhile, nervous markets are dealing with contradictory data. Employment is deteriorating in the US (perhaps the latest figures are hurricane-affected?), under the watchful eye of the FED. But housing starts, industrial production, capacity utilization, retail sales and the Philadelphia Fed’s business outlook survey all seemed to surprise expectations this week. Nevertheless, since the end of the second half of the year, the trend in economic surprises has remained firmly downbeat. Investors continue to believe that the soft landing scenario will come true (2 out of 3 chances) according to Bank of America surveys, 100% convinced that it will allow the FED to cut rates in September. But the tension is becoming palpable.
The only real certainty is that the United States seems to be on a permanent course towards a trade tug-of-war with its adversaries. Biden, who has not unraveled any of Trump’s protectionist measures, is going back on the offensive, attacking recalcitrant semiconductor groups. Beware of those who continue to trade their technology or hide massive micro-engineering weapons in China… It cost European champion ASML no less than 14% in two days, despite record sales from TSMC, one of its main customers. Other giants in the sector, such as Nvidia, also under pressure, with daily variations easily approaching $100 billion in capitalization lost or gained, are approaching the fateful date of their quarterly publication. With growth expectations and valuations fierce, disappointments can be ruthlessly punished in the current climate.
If elected, Trump will probably seek to deal China the coup de grace. His battery of new trade barriers could cost the Middle Kingdom 2 growth points, according to UBS economic research. In the wake of disappointing growth figures, leaden by domestic consumption, the plenum’s minutes were still filtering out at a monotonous drip-feed pace. The party did not come out in favor of a major stimulus and seems to have sidestepped the issue of the housing crisis. The political exercise seems hollow. The Politburo’s meeting at the end of the month will now focus all our unfulfilled hopes. In the meantime, industrial commodities are suffering.
Between economic slowdown and ” trumpflation”, the US yield curve swings… Sometimes in the direction of repentification, sometimes in the opposite direction, heckling stock market indices, contradicting the violent rotation movements between the various factors, or from the Nasdaq 100 to the Russell 2000.
The S&P500 returned to volatility, closing two sessions down by more than 1% in a row. Its implied volatility indicator, the VIX, rose to 16, its highest level since April, but well below last October’s levels. Investor demand for credit remains excessively higher than supply, for the time being compressing spreads on high-yield deposits, whose widening often bodes ill for equity markets. It’s not yet storm time, but apprehension seems to be gradually setting in. “If it’s not raining today, it’ll be raining tomorrow” goes the Irish adage… Will investors change their mindset and face uncertainties more cautiously this summer?
Text completed on July 19, 2024 by Thomas Planell, Manager – Analyst.
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