S'agit-il seulement de la hâte ?

Bill Dudley a appelé la Fed à réduire son taux directeur cette semaine déjà, étant donné l'accumulation des signes d'atterrissage de l'économie américaine, avec des fissures apparaissant en particulier dans la capacité de dépense des ménages vers le bas de l'échelle des revenus. Nous sommes d'accord pour dire que les derniers chiffres de l'indice PCE devraient ouvrir la porte à une véritable réorientation de la politique de la Fed - bien que nous n'ayons jamais cru à l'enthousiasme du marché jusqu'à l'hiver dernier pour une demi-douzaine de réductions en 2024, nous avons également rejeté l'hypothèse « pas de réduction cette année » - mais les chiffres du PIB du deuxième trimestre étaient probablement « trop décents » pour que le FOMC passe en mode d'urgence. Quoi qu'il en soit, Jay Powell peut facilement se débarrasser de la « critique de retard » en télégraphiant très clairement qu'une réduction interviendra en septembre et qu'il s'agira du début d'un processus de « suppression des restrictions ».

Nous continuons à nous concentrer davantage sur la difficulté pour la Fed de continuer à réduire ses taux en 2025 si D. Trump est élu. La course à la présidence américaine s'est resserrée et, bien que nous ne nous attendions pas à ce que les questions économiques occupent une place très importante dans les débats des trois prochains mois, le résultat aura une importance considérable dans la sphère économique mondiale. Dans ce contexte, nous examinons le communiqué du plénum du parti communiste chinois qui, à notre avis, confirme l'accent mis par Pékin sur l'offre dans l'économie. Nous continuons à penser que la demande intérieure reste le point faible de la Chine et nous sommes frappés par le fait que de plus en plus de pays - même dans le Sud - prennent des mesures contre les importations de produits chinois.

La BOE et la BOJ se réunissent cette semaine dans un contexte macroéconomique incertain. Dans l'ensemble, nous pensons que la BOE réduira ses taux de 25 points de base, mais la décision sera difficile à prendre car le comité de politique monétaire sera probablement divisé. La BOJ doit normaliser sa position plus rapidement pour soutenir la monnaie, mais l'économie reste médiocre. Nous pensons que la combinaison d'une réduction massive du volume des achats d'obligations - jusqu'à 3 000 milliards par mois - et d'une hausse des taux serait trop décourageante.

Enfin, nous examinons les récentes enquêtes sur la confiance des entreprises dans la zone euro. En France, elles confirment l'attentisme des entreprises dans un contexte d'incertitude politique toujours élevée, mais nous attirons l'attention sur la faiblesse des indicateurs allemands. Cela devrait aider les faucons de la BCE à accepter de ne pas s'opposer à une réduction en septembre.

Vous pouvez lire l'analyse de Gilles Moëc ci-dessous.

Hearing Dudley’s call?

When Bill Dudley, formerly President of the New York Federal Reserve Bank and Vice-Chair of the FOMC, changes his mind, it’s a good idea to listen intently. In his latest column for Bloomberg, he came in favour of cutting rates “now” – i.e., at this week’s meeting – after considering for some time that there was no point in hurrying. ​ Dudley is no starry-eyed dove. He criticized the Fed’s new “Flexible Average Inflation Targeting Model” introduced in August 2020, which in effect called for waiting until the economy is “red hot” before moving to monetary restriction, as ill-fitted to spot inflation shocks in time and had been calling for rate hikes in 2021 (the first one came in March 2022).

His line of argumentation is simple: on the real side of the economy, while wealthy individuals can still sustain a high level of spending, “cracks” are appearing for those at the lower end of the income ladder as higher interest rates hurt via car loans and credit cards bills. Construction is finally being hit by high mortgage rates. Jobs are still being created but at a slower pace, and Dudley – as we did in Macrocast three weeks ago – pointed to the “Sahm rule” to argue that the recent rise in the unemployment rate called for attention. In those circumstances, given the good news on the inflation front, why wait to start removing accommodation?

The market seems to hear Dudley only partly. As we illustrate in Exhibit 1, while the market is now firmly expecting the Fed to cut at the September meeting, the “105% probability” on that date suggests that investors see the chances of a Fed move at this week’s meeting already as only marginal (5%).

Interestingly, the probability for July cut fell a bit, from 8% from last week. We suspect this is the result of the GDP print. We wrote that the only thing which could tilt the Fed into cutting in July already would be a “truly horrendous” GDP print for Q2. Instead, GDP surprised to the upside again, at 2.8% against 2.0%, double the Q1 pace and exceeding the US potential growth rate (usually seen at c.1.75%). To eliminate a usual source of gyrations – stock building – and get a sense of the current domestic dynamics of the US economy, we can look at domestic final sales, i.e., GDP minus the change in inventories and net trade. The message is that the pace has abated from 3%+ in the second half of 2023 to 2%+ in the first half of 2024. The US economy is landing, but only very slowly (see Exhibit 2). This does not seem to call for emergency monetary support.

True, focusing too much on GDP triggers the risk of driving while gazing too much at the rearview mirror. We have already highlighted in Macrocast how the surveys – in particular the ISM – pointed to some difficulty in sustaining such decent growth rates into the second half of the year. Recent earnings reports by consumer goods’ businesses in the US also lend credibility to the thesis that households spending is starting to get soft.

Besides, GDP was not the only interesting data print last week in the US. The Personal Consumption Expenditure deflator (PCE) for June, the Fed’s favoured gauge of inflation, largely confirmed the message from the CPI earlier in the month. On a 3-month annualised basis, core PCE is now very close to target at 2.3%. The re-acceleration of last winter now seem to have completely faded. Perhaps more importantly, the ongoing deceleration cannot be attributed to core goods, which are now flat, but essentially came from services, the most reflective of the macro dynamics at work in the US domestic economy (see Exhibit 3).

Unfortunately, the Fed won’t have the payroll data for July before making their decision. Yet, another important point to consider as well in the current calibration of the Fed’s stance is that the current level of the policy rate is high relative to any realistic estimate of the equilibrium level. To avoid having to embark in a quick succession of rate cuts down the road – never a credibility-affirming option – to reach safe accommodative territory, starting the process early enough would be an asset. Jay Powell can however shake most of the “lateness critique” this week by telegraphing sufficiently clearly the September cut – and crucially that it would only be the beginning of a series of cuts. This would entail making it clear that the June “dot plot” is obsolete. Yet, given Powell’s very prudent handling of the dot plot then, this should not be too much of a hurdle.

Habitual readers of Macrocast will be familiar with our point that it’s the Fed’s trajectory for 2025 which is more uncertain given the radically different possible macroeconomic outcomes of the US presidential elections. According to the few polls conducted after Joe Biden decided to step aside, Kamala Harris has been able to tighten the race significantly, even if most polls still put Donald Trump in the lead. Looking carefully at the data, it seems she has been able to bring back Democratic-leaning voters who did not want to be squeezed in a repeat of the 2020 race (support for the Green candidate Jill Stein – a natural refuge for some Democrats – fell). ​ It is early days though. We are not readying ourselves to a “economy-intensive” debate. Kamala Harris needs to distance herself from Biden’s tenure on that front – even if fundamentally he delivered some important measures to lift the country’s growth potential – given public opinion focus on inflation. She is not going to send anyone’s blood racing by pledging a fairly prudent approach on fiscal policy by allowing some of the Jobs Act of 2017 tax cuts to expire. She is likely to focus on women reproductive rights, while Trump will attack her on immigration and law and order.

Yet, the “Trump Trade” is real. Our colleague David Page has just put a topical note out (see link here) on the US elections, illustrating how the gyrations in the polls do have some explanatory power over the residuals of canonical models predicting US yields and the dollar exchange rate. Higher odds of a Trump victory do push 10-year yields and the dollar up. That the presidential elections are not fought on the economy does not mean they won’t have a significant impact on the economy.

China’s strategy dilemma

This goes obviously well beyond the United States. Harris would probably emulate Joe Biden in maintaining the current tariffs against Chinese products, but she would be unlikely to intensify the trade war, unlike Donald Trump. The latter outcome would come at the wrong time for China.

It’s of course too simplistic, but a good way to characterise the current economic choices in China consists in simply looking at retail sales – proxy for consumer spending – against industrial production (see Exhibit 4). The discrepancy is massive. Another “twin figure” may help get into the nitty gritty: in Q2 2024, domestic sales of cars fell by 5.4% yoy in China, while automobile production rose by 6.1%. In other words, foreign absorption is vital to China’s industry. 

We have already discussed in Macrocast the EU’s – provisional – decision to impose tariffs on imports of Chinese EVs, but what we also find increasingly problematic for China’s export machine is the fact that the alarm over unbalanced trade relationships with China has spread to key countries in the “Global South”. On 28 June, Indonesia’s Trade Minister announced his country would impose tariffs on some key Chinese imports of between 100% and 200%. Indonesia stands for only about 2% of total Chinese exports, but this should still be a source of concern for Beijing: substituting “South-South” trade to the old “South-North” pattern is not going to be straightforward.

Two weeks ago, the Plenum of the Central Committee of the Chinese Communist Party released a detailed policy paper (see link here). There was no hint at a change in the overall economic strategy. The word “consumption” appeared only 5 times in the 48 pages-long text, including twice in relation to energy, while “investment” came out 28 times. China is still intent on focusing on the supply-side. The document contains a defence of traditional “trickle down” through which the development of high productivity industries – under the “new quality production” model – spearheads GDP growth. Still, we maintain the view that, historically, maturing economies found a “second breath” only when they increasingly directed productivity gains towards expanding domestic consumption via higher real wages. The policy document mentions “putting in place systems to effectively boost the incomes of low-income earners, steadily expand the size of the middle-income group, and properly regulate excessive incomes”, but there was no explicit mention of the link between productivity and salaries.

If no major policy shift is foreseeable for the near-future, Chinese demand could be supported by short-term “fixes”. On Monday last week, the PBoC cut the 7-day reverse repo rate by 10bps. Shortly after, the market rates Loan Prime Rate (LPR) for 1-year and 5-year were reduced by 10bps, to 3.35% and 3.85%, respectively. Then the PBoC surprised the market again on Wednesday with a 20bps cut to the 1-year MLF rate, reducing it to 2.3%. They also injected RMB 200bn via MLF facilities, resulting in the first positive monthly net injection (RMB 197bn) since February. It is rare for the PBoC to act so quickly and frequently.

Now, we continue to find it striking that policy rates have been reduced by only 100bps or so from peak (see Exhibit 5) in a country which has been flirting with deflation. The PBoC may this time have been emboldened by the relative stability of the CNY these last few months (see Exhibit 6), in a context when the market is pricing rate cuts from the Fed again. In our view, loosening monetary conditions in China is justified by the need to revive domestic demand. At the same time, if an acceleration in the PBoC cuts is confirmed, this could trigger more acerbic comments in the US, given the frequent accusations of “FX manipulation” against China, which have been revived in the current presidential campaign as Donald Trump has seized on the “strong dollar” issue, linking it to labour market difficulties. Note however that the CNY depreciation from the peak in early 2022 (12.7%) would be small beer relative to the effect a 60% tariff would have on Chinese shipments to the US, while it could exacerbate protectionist tendencies in the “Global South” and the EU. These “short fixes” are no panacea.

The BOJ dilemma

The BOJ is the other major central bank meeting this week. The market is torn on what to expect: as of last Friday, it was pricing a rise in the policy rate of 5 bps, basically half the new “usual quantum” for a rate hike by the BOJ. We are similarly torn. Of course, we notice that the commentariat is increasingly presenting a hike this week as a done deal – reflected in the shift upward in the market pricing over the month, but we are concerned about the combination of a rate hike with the expected announcement of the quantum of reduction in BOJ purchases of bonds in a difficult macro context for Japan. Indeed, while a further normalisation of the BOJ stance would of course help support the currency, and hence dampen the ongoing steep acceleration in import prices, the central bank needs to deal with a deteriorating economic outlook. Indeed, the Japanese PMI in the manufacturing sector, which is supposed to benefit most from the yen depreciation, fell back in contraction territory again in July. Moreover, inflation in the Tokyo area which comes out ahead of the national index slowed down in July, with core at 1.5% yoy, down from 1.8% in June.

Ultimately, in a hazy macro configuration, we think the BOJ will try to find a compromise. The market’s baseline is that the BOJ will reduce its bond purchases from the current monthly pace of 5.7 trillion yen to 4 trillion yen, and further cut it to 3 trillion yen in the second year, with a possibility to “jump” to the latter pace immediately. If the latter option were to be chosen, we think combining this with a rate hike would be too daunting.

The Bank of England will also meet this week. We have already covered this in the previous issue of Macrocast. Ultimately, as often it will be a close judgement call for the MPC, balancing “not so great” current price data against what is probably a favourable outlook given the beginning of a deterioration of the labour market. We expect a close 5-4 decision in August for a 25-bps cut, with a low level of confidence.

The Euro area’s “soft patch” goes beyond France

There was little doubt that the snap elections in France would have a significant impact on business confidence. The INSEE survey confirmed it, with a sharp decline in both the manufacturing and services sector (see Exhibits 7 and 8). In the latter, there was however a complete divergence between the message from the PMIs and from INSEE. This is not exactly new (the PMIs drew a particularly gloomy picture of the French economy in the second half of 2023, contradicted by mediocre but still positive GDP prints). But we suspect that in July the gap comes from a difference in the timeline of the surveys. Indeed, INSEE collected responses mostly between 27 June and 12 July, when political uncertainty was at its peak, while Markit collected data for the PMI from 11 July to 22 July, when the most radical outcomes had already been taken off the table. Yet, we have little doubt Q3 GDP will be mediocre in France, despite the usual boost from the Olympic games.

France is however not our point of focus. We are more interested in the developments in Germany, where no “exogenous event” should be disturbing the macro dynamics. There, while there are differences in level, the PMIs and the IFO surveys send the same message: the economy is not recovering (see Exhibit 9 and 10).

This should make the ECB hawks less reluctant to embark on the removal of monetary accommodation come September. Indeed, it is in Germany that wage developments have been the most concerning, from a price stability point of view. Even if so far the state of “quasi recession” has had only a limited impact on the labour market, we should gradually see the labour movement take the macro situation on board and accept a return to wage moderation.