11.10.2022 Finance economy International Luxembourg

A recession seems inevitable

Although the global economy is showing some resilience in  the face of the many uncertainties, a recession seems inevitable, writes Guy Wagner and his team in their latest monthly market report “Highlights”.

In the US, household consumption continues to grow at a moderate pace, supported by a robust labour  market that still shows no signs of slowing. “Nevertheless, most leading indicators point to a slowdown,  and the housing sector, which usually reacts first to monetary tightening, is showing a decline in both  building permits and house prices”, says Guy Wagner, Chief Investment Officer (CIO) of the asset  management company BLI – Banque de Luxembourg Investments. “In the eurozone, governments are  aiming to mitigate the economic slowdown with further public support measures, with Germany having  just announced a support package totalling EUR 200 billion.” In China, the public authorities are trying  to counterbalance the weakness of activity resulting from the persistent difficulties in the real estate  sector and the general climate of uncertainty following the zero Covid policy by boosting investment in  infrastructure. Japan remains one of the few countries to support activity through a monetary policy that  is still very accommodating, its inflation rate being much lower than in Western countries.

Eurozone inflation reaches new highs

Although US inflation fell for the second consecutive month in August, it is too early to call the easing  sustainable. “However, the high basis of comparison, the reversal in commodity prices and the  weakening global economy point to a gradual but slow deceleration in inflation in the coming months”,  believes the Luxembourgish economist. In the eurozone, the pressure on energy prices has pushed  inflation to new highs.

Central banks tighten monetary policy aggressively 

In September, central banks continued to tighten monetary policy aggressively as expected. The US  Federal Reserve’s Monetary Committee raised the target range for the federal funds rate by 75 basis  points to 3% – 3.25%, marking the third consecutive 0.75% rate increase. Fed-Chairman Jerome Powell  reiterated the Committee’s determination to stay the course of tightening as inflation remains stubbornly  high and the labour market very tight. In the Eurozone, the European Central Bank also raised its main  policy rate by 75 basis points to 1.25%. Guy Wagner: “This was the first time since the introduction of  the single currency that a move of this magnitude had been made.” Like her American counterpart, the

president of the Governing Council, Christine Lagarde, also insisted on the continuing need to combat  excessive inflationary pressures with significantly higher interest rates.

Further surge in bond yields

The restrictive stance of central bankers regarding the future path of policy rates triggered a further  surge in bond yields. The benchmark 10-year rate rose in the US, briefly touching the 4% mark during  the month. In the euro area, the yield to maturity on the 10-year government bond rose in Germany, in  France, in Italy and in Spain.

Equity markets continue to correct 

In September, equity markets continued the correction started in August. “Interest rate hikes and fears  of recession weighed on stock prices, with most indices down by at least 15% since the beginning of  the year,” specifies Guy Wagner. At the regional level, the S&P 500 in the US, the Stoxx 600 in Europe,  the Topix in Japan and the MSCI Emerging Markets Index fell over the month. “At the sector level,  healthcare proved particularly resilient, while real estate and technology corrected the most.”

Source: BLI - Banque de Luxembourg Investments