Rising long-term yields in the US are causing waves in the region : they have reverted FX gains seen earlier in the year, redirected portfolio flows and are complicating plans to issue debt to fund the energy transition.
GDP growth, inflation, interest rates and exchange rates
In Central Europe, capital flows (foreign direct investments, portfolio flows and bank lending flows) have resisted rather well despite geopolitical uncertainties. Similarly, they do not seem to be affected, for the time being, by the weakening of economic activity in the region.
In the US and several European countries, gross public sector borrowing requirements are expected to remain sizeable and the reduction in the size of central banks’ balance sheets -quantitative tightening- complicates matters. The impact on bond yields will depend on the risk-bearing capacity of investors. Their ability and willingness to increase their exposure to duration risk depends on several factors: the existence or absence of strict duration risk limits in portfolios of institutional investors, risk aversion in reaction to recent bond yield volatility, uncertainty about the outlook for official interest rates, the correlation between bonds and equities, the balance sheet capacity of financial intermediaries
US Treasury yields have increased significantly since the end of July and this movement has accelerated in the past three weeks. It seems that the increase in the term premium has been a key driver although there is ambiguity about the underlying causes. There is no ambiguity however on the economic consequences: they are negative. A key channel of transmission is the housing market. Credit demand in general should suffer and another factor to monitor is the equity market considering that the earnings yield of the S&P500 is now lower than 10-year Treasury yields. All these factors represent a headwind to growth and may convince the FOMC that an additional rate hike before the end of the year is not warranted
Since its publication last May by France Stratégie, the "Pisani-Mahfouz" report on the cost of ecological transition in France has been the subject of numerous, sometimes imprecise comments. For example, the main quoted figure of EUR 66 billion does not refer to the investment required for decarbonization, but to a net additional financing requirement. Explanation.
GDP growth, inflation, interest and exchange rates.
Stylised facts are recurring patterns between economic variables and between economic variables and financial markets. They are conditioned by the economic environment and shape expectations of households, companies and investors. They are also used when producing economic forecasts. In the current cycle, there is doubt whether certain stylised facts still apply. In the US, the economy is still growing despite a significant yield curve inversion and aggressive rate hikes. In the Eurozone, the labour market thus far has been resilient notwithstanding the actions of the ECB. Moreover, financial market investors are undeterred by the talk by economists about recession risks. Several factors help to put these, at first glance puzzling observations, into perspective
GDP growth, inflation, interest and exchange rates
The interest rate projections (‘dots’) of the FOMC members represent a reference point that can help investors and economic agents in general in forming their own interest rate expectations This can be particularly welcome when the monetary environment is changing swiftly like has been the case over the past two years. To explore this, a comparison has been made between the federal funds rate projections of the Survey of Market Participants (SMP) and those of the FOMC members. It seems that the dots may play a role in anchoring long-term interest rate expectations. The private sector forecasts closely follow the dots for 2023 and to a lesser extent for 2024, beyond which they are essentially stable. This is important considering that it might influence the pricing of bonds
Rates and exchange rates - GDP Growth and inflation
In March 2023, the M2 measure of money supply contracted for the fifth consecutive month in the United States (-4.5% over one year).
GDP growth, inflation, interest rates and exchange rates.
After last year’s significant depreciation versus the dollar, the euro has found a new strength. Key factors are the reversal in the current account balance, which after moving into negative territory last year is back into surplus, and, since the autumn of 2022, the narrowing of the 1-year interest rate differential with the US.This reflects the view that the Federal Reserve is approaching the end of its tightening cycle whereas the ECB still has more work to do. We expect that this factor will continue to drive the exchange rate in the coming months. Moreover, there is also a higher likelihood that the Federal Reserve will cut rates before the ECB does
