08.07.2022 Finance International

Guy Wagner (BLI - Banque de Luxembourg Investments): The global economic slowdown is intensifying

Rising interest rates, the post-pandemic normalisation of government spending, high energy costs and general price increases are starting to weigh on growth, write Guy Wagner and his team in their latest monthly market report “Highlights”.

“The weakness in activity is not confined to the manufacturing sector, which is additionally affected by  the shortage of various materials and components. It is also affecting services activities despite final  lockdown measures being lifted,” says Guy Wagner, Chief Investment Officer (CIO) of the asset  management company BLI – Banque de Luxembourg Investments. In June, the purchasing managers’  activity indicators fell sharply in the United States and Europe, in both the manufacturing and services  sectors. China was the only country to post a rebound in its activity indicators, following the reopening  of its main metropolises, including Shanghai. “However, the continuation of its zero-tolerance strategy  for new Covid-19 infections could trigger a return to strict lockdown measures at the slightest sign of  excessive spread of the virus.” In Japan, economic growth continues to depend on higher exports: on  the one hand these are benefiting from the yen’s ongoing weakness, but on the other hand they are  likely to be affected by a gradual diminution of global demand.

No sign of inflation settling down 

High inflationary pressures show little sign of easing. In the United States, headline inflation rose from  to 8.6% in May, its highest level since December 1981. In the eurozone, inflation is continuing to climb  to new record levels since the introduction of the single currency. From May to June, headline inflation  also increased to 8.6%.

Record rise in the US fed funds rate 

With inflation figures showing no sign of abating, the Federal Reserve’s monetary policy committee (the  FOMC) accelerated the tightening process at its June meeting with a 75 basis point hike in interest rates,  the biggest jump since November 1994. Chairman Jerome Powell did not settle the debate as to whether  the rate hike at the next meeting at the end of July is likely to be half or three-quarters of a point. While  the top monetary official intends to guide the US economy to a soft landing rather than a recession, he  says the fight against inflation is ‘unconditional’, with the restoration of price stability the current priority.  As expected, the European Central Bank left its key interest rates unchanged at its June meeting. It

reiterated that it will end net purchases under its asset purchase programme by the end of June with a  view to starting to raise interest rates at the Governing Council meeting on 21 July.

Government bond yields continue to rise 

On the bond markets, with no sign of inflationary pressures easing, government bond yields rose sharply  in the first half of June. “In the second half of the month, this trend was reversed as fears of recession  gained the upper hand, fuelled by increasing signs of economic slowdown,” says the Luxembourgish  economist. Over the month, the benchmark 10-year yield continued to rise in the US, in Germany, in  France, in Italy and in Spain.

Sharply declining stock markets 

Equity markets fell sharply in June, posting one of the worst first-half performances in stock market  history. “Persistent inflation, interest rate hikes and the economic slowdown are weighing on equity  prices.” The MSCI All Country World Index Net Total Return expressed in euros fell by 6.2% in June  and is down 13.2% for the first half of the year, despite the beneficial effect of the strong dollar. “In terms  of sectors, healthcare and consumer staples were the most resilient in June, while energy corrected  sharply, albeit remaining the only sector recording considerable gains since the start of the year,” concludes Guy Wagner.

Source:  BLI - Banque de Luxembourg Investments and Banque de Luxembourg