The HCOB PMI® Flash index for August shows a continued acceleration in activity, boosted by the services sector, driven notably by France and the Olympic Games effect.
On the other hand, the manufacturing industry remains clearly in pain, a deterioration that is also increasing, with the index falling to its lowest level for eight months.
Of course, the European Central Bank is preparing a further cut in key interest rates as early as next month, which will give some air to the private sector. But the economic actors are not fooled. They are well aware that, at the same time, States will have to begin the painful consolidation of public finances, which will result in a reduction in aid and subsidies that have helped reduce the impact of soaring prices on households.
The industry also knows that regulatory constraints will increase and production costs will rise – in Germany, the agreement between unions and industry aims for a 5.6% wage increase by 2024. Industry is losing competitiveness and exports as well as order books are suffering. In these conditions, it is difficult to envisage a marked improvement for the sector. And while services now dominate Western economies, it is also certain that no economy can do without a competitive industrial sector, especially if it wants to be taken seriously on the world stage.
The euro at its highest in 2024
The euro exceeded during the week 1.11 USD, marking a high for the year 2024.
This is not an isolated case. The Japanese yen, the pound and many other currencies have strengthened against the US dollar in recent weeks. The reason for this is the path expected for US policy rates.
The report of the last Fed monetary policy meeting shows that the vast majority of its members believe a decline would be likely at the September meeting and that some of them would have already wished for a first Meeting at the end of July. The long-awaited pivot of US policy interest rates will therefore take place on 18 September.
However, investors believe it will be too late and that the Fed will have to make up for this delay by acting more aggressively. They therefore started betting on particularly turbulent scenarios, including between three and four US policy rate cuts over the remainder of 2024, and up to eight in the coming twelve months. Such a rapid decline in interest rates seems only plausible if US economic activity is seriously falling into a dry spell, which is not our scenario.
Otherwise, with inflation still above target levels, the Fed would have a hard time justifying such a steep decline cycle. In addition, if the world economy underperforms, Europe, already very weak, may suffer more than the USA, which still has a strong employment market are self-sufficient in energy, and dominate the most important sectors of the economy.
We therefore believe that a continuation of the appreciation of the euro, towards values of about 1.20 USD for 1€ which marks the level of balance between the two, remains difficult in the immediate term.
While the US dollar remains overvalued against our currency, its cost is less than in the recent past. This makes U.S. assets more attractive. We continue to invest in the US, both in bond and debt markets.