05/22/2023

The macroeconomic boost in Europe is disappointing, weighed down by the worrisome divergence between the strong activity of the service sector and the intense slowdown in industrial activity. The latter matters more in Europe than in other regions, given the greater dependence of its main economies, such as Germany, on the manufacturing sector. On the other side of the Atlantic, the feared economic slowdown in the United States does not seem to be taking shape, and activity is resisting quite well. The figures for the last week mostly been a pleasant surprise, especially with regard to the labor market. Meanwhile, the consumer continues to spend and, unlike China and Europe, industrial production recovered clearly in April. Of course, higher interest rates and the tightening of credit conditions by regional banks should start to weigh more and more on growth and employment in the coming quarters, but recent signs point to the surprising resistance of the US economy.

In the area of monetary policy, the solid macroeconomic data published, some easing in the tensions affecting regional banks and the aggressive comments of several members of the Fed all left the market expecting a potential new rate increase in June. Some members of the FOMC, such as Harker, Bowman, Mester and Barkin, have expressed their willingness to consider additional rate increases. Goolsbee and Bullard have also wondered whether the current monetary policy is sufficiently restrictive. Logan, from the Dallas Fed, said last week that a rise in June was the baseline scenario. The Fed president Powell's comments were interpreted by the market as contrary to a new rate increase. In short, the likelihood of a new rate adjustment rose following the June Fed meeting, although no change remains our main expectation. Finally, the ECB Chair, Christine Lagarde, indicated that price growth was showing signs of deceleration, highlighting that the ECB is beginning to notice the effect of its measures but adding that high interest rates were needed for a prolonged period of time.

If the Treasury Secretary, Janet Yellen, is right, the US government will be left without money to meet its obligations from 1 June, the so-called "X date". With less than two weeks to go, no agreement has been reached at the time of writing. However, financial markets have been surprisingly calm, in contrast to the period preceding the 2011 debt ceiling crisis.

Investors consider agreement to be certain and there is no need to worry, but the truth is that volatility could very well increase as we approach the feared date. Even if an agreement is reached between President Biden and Speaker McCarthy, we cannot rule out accidents with such a tight deadline. If negotiations continue until the last minute, the markets are guaranteed to become nervous.

Aside from negotiations related to this issue, the market will be keeping a close eye on what prices do. This will pay special attention to personal consumption expenditure in April, which will show little or no progress in the process of deflation. Similarly, the final May reading of the long-term inflation expectations from the University of Michigan will have to confirm whether the recovery shown by preliminary estimates can be maintained. Attention will also focus on the minutes of the FOMC meeting of 2 May, where we expect greater likelihood of no change to the institution's adjustment process. In Europe, the preliminary PMI for May could show the first signs of a broader economic slowdown, driven by the persistent contraction of manufacturing activity and less expansive services.

Meanwhile, risk assets have experienced one of their best weeks in recent months. However, it is clear that the risk environment remains complex, so we will watch developments carefully to take the necessary actions if the scenario becomes further complicated.