Contemplation while waiting for central banks
The financial markets seem to have turned towards consolidation following the rally driven by the central banks’ change in tone at the end of 2023. The meetings of the ECB followed by the Fed at the end of the month are the next important events to come.
In both the United States and Europe, statistics for December show a slightly less favourable consumer price dynamic than in November. However, when smoothing the data over three or six months, the verdict remains the same: in the eurozone, core inflation has converged towards the ECB’s 2% target, with a fairly similar trend in the United States when corrected for the impact of rent (cf. chart 1). Rent makes up 42% of the core CPI and only reflects the movement towards disinflation in the sector after a long delay. The Federal Reserve is not targeting the CPI, but rather the consumption deflator, where rent is only weighted half as strongly (next statistic on 26 January).
Having already well incorporated the previous good inflation figures, investors are evidently keeping a keen eye on anything that could disrupt the ideal scenario of a soft landing and rate cuts to come. For instance, the events in the Red Sea are already driving up the price of sea freight on certain routes. On the other hand, energy prices remain reasonable, with oil prices stable at around $75–80 per barrel and a relaxation in natural gas prices in Europe (cf. chart 2). In Germany, wholesale electricity prices continue to decrease progressively and have fallen below €100 per megawatt hour for the first time since summer 2021. Finally, all is also calm on the industrial raw materials front; the Chinese economy remains on a moderate growth path, driven on the one hand by investment in manufacturing but stifled on the other by disinvestment in real estate.
Amongst the data to watch are European wage negotiations, with the ECB seeming to attach some importance to this. Ms Lagarde nevertheless mentioned interest rate cuts in her latest interview, although still in a very cautious and conditional way. We will see what stance the two major central banks take at the end of the month at their next monetary policy meetings. The Fed will likely prove satisfied with inflation but observe that the economy remains fairly strong, which may not make the case for rapid rate cuts. In Europe the economy is weaker, but disinflation more recent. It would however be surprising if ECB members did not discuss interest rate cuts at their meeting, in contrast to how things transpired in December.
In our global diversified funds, our positioning remains as follows: overweighting of equities, a moderate bond duration for hedging in the event of an economic slowdown, and returns on money market instruments in euro. In anticipation of an ECB pivot and a gradual recovery in activity, we are maintaining a high exposure to equities in our flexible European funds. In these funds, in addition to a core basket close to Euro Stoxx 50, we are investing in a diversified basket of small and medium-sized stocks, banking stocks and companies benefiting from the themes of productivity and the energy transition.