There’s been an improvement in economic newsflow from the eurozone recently. Purchasing managers’ indexes (PMIs) remained in contraction territory in November but rose slightly, pushed up by both manufacturing and services. The readings exceeded economists’ expectations, particularly the uptick in the German PMI. In addition, Germany’s IFO, which measures the country’s business climate, gained ground for the second month in a row. It looks like the worst is now behind Europe’s largest economy, which was weakened by the energy crisis and by the slower-than-expected recovery in China. This is also very good news for the broader eurozone economy – the economic outlook for the region should brighten now that the European Central Bank has almost certainly finished raising interest rates.
Are central banks looking for a new North Star?
The surge in inflation across the developed world over the past two years has sparked criticism about the major central banks’ role in this price frenzy. In particular, experts have questioned whether it was right for central banks to keep their ultra-loose monetary policies in place from the 2008 financial crisis right up to early 2022, a period when a number of unconventional policy methods, like quantitative easing, were adopted. During that time, central banks also became complacent about inflation, largely because of the models they use to forecast future price movements. Those models tend to be based on the output gap, which is the difference between an economy’s actual and potential output. Almost 15 years after the 2008 financial crisis, these models were indicating that developed economies were not yet at full capacity, which meant there was little risk of an uptick in inflation. However, all it took was a couple of supply-
chain bottlenecks, caused by the COVID-19 pandemic, and an energy crisis, triggered by the war in Ukraine, to shift from a highly disinflationary environment to one that stoked fears of hyperinflation. That left central bankers’ certainty about their approach in tatters. They’re now afraid of getting it wrong a second time, which is why they feel the need to justify their decision to keep interest rates high for longer than needed. In the absence of more reliable models, their main concern is preventing another surge in inflation. Investors don’t see it that way. As they wait for central banks to restore confidence in their models, they’re focusing on the facts. And what they’ve seen is that commodity and consumer prices have dropped off considerably. They’re also expecting rate cuts to begin next year. This supports our positive outlook on traditional asset classes. After 18 very tough months, the bond market should fare well for the rest of this year and into 2024. With long-term yields at a 15-year high, we think the US-dollar market offers the most appeal.
This was the value of online sales on Black Friday, which were up 7.5% on the year-earlier figure. US consumers are doing well – unemployment has stayed low and their purchasing power has remained solid.
Chief Investment OfficerlinkedIn
Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.