This is mainly due to the fall in energy prices (4%). Excluding energy and food, core inflation stabilised at 3.2% last month. These latest inflation figures will reinforce the US Federal Reserve’s determination to reduce its key interest rate, which has been stable at 5.5% for over a year. However, this first monetary easing since the beginning of 2020 will likely be limited to 0.25%.
The persistence of some inflationary pressures and continuing substantial wage increases despite a less dynamic labour market will prompt major US investors to exercise caution, especially since the US economy is still dynamic.
The slow and gradual decline in interest rates will allow the US economy to continue expanding over the medium term. Buy 5, 10 or 15% of US shares as part of a defensive, neutral or dynamic portfolio. Buy dollar bonds as well, regardless of your risk profile.
Immediate Reduction Of The Key Interest Rate In The Euro Area Is Essential
After reducing the money rate in June, the European Central Bank again lowered its key rates at its monetary committee on 12 September.
The interest rate on the deposit facility is reduced by 0.25% to 3.50%. This is the primary ECB policy rate because it is the interest rate that pays for money deposited by euro area banks with the ECB. To reduce the spread between its key interest rates, the ECB lowered the interest rates on primary refinancing operations and the marginal lending facility by 0.60% to 3.65% and 3.90%, respectively. These are the interest rates that banks have to pay for money they borrow from the ECB. They are now entirely secondary because the banking system is crammed with excess liquidity and does not need to call on the ECB to finance itself.
With this second cut in key interest rates three months after the first, the major European currencies are firmly committed to a monetary easing cycle. There is no indication that the movement will accelerate. If a further decline in October is not entirely excluded, keeping pace with quarterly adjustments and waiting until December is the most likely option.
On the one hand, the major European financiers recognise that the economic situation remains challenging, with household consumption disappointing. The ECB has slightly revised its growth forecast downwards. GDP is expected to increase by only 0.8% this year. On the other hand, resistance to inflationary pressures, particularly in services, is delaying a return to 2% inflation, the official ECB target.
In concrete terms, even after the June and September cuts, ECB policy rates remain restrictive for the European economy. The cumulative 0.50% decline in the money rent is insufficient to boost economic activity in the euro area.
Foreign trade to the rescue of China
Chinese exports jumped 8.7% in August compared to the same month last year, their highest level in 23 months.
Over the first eight months of the year, Chinese exports to Latin America and its Asian neighbours have risen by more than 10%. They also increased significantly towards India (4.2%).
Despite trade tensions, Chinese shipments to the US also increased (+2.8%). On the other hand, exports to the European Union remained virtually stable (+0.7%) due to the weak economic dynamism of the old continent.
More than ever, China’s economic activity is based on international demand as domestic consumption remains low. Imports remain sluggish, rising by only 2.5% since 1 January. Weak domestic demand also translates into meagre inflation, at just 0.6% in August. While most countries faced price slippage, China has not seen inflation above 1% since January 2023. It has even been negative five times in the last 14 months.
While the Chinese economy will take time to overcome its current difficulties, there is still some exciting potential. From a long-term perspective, buy 10% of Chinese shares as part of a neutral or dynamic portfolio. In a defensive portfolio, opt for 5% of Chinese shares and 5% of bonds in yuan.