Eurozone: inflation resumes a downward trend
Now at 2.6%, European inflation is increasingly approaching the 2.0% target defended by the ECB—enough to revive the debate about the timing of the first fall in key rates.
According to Eurostat’s rapid estimate, inflation in the euro area fell in February to no more than 2.6%, compared with 2.8% the previous month. Even if it is less pronounced than in the recent past, the fall in energy prices (-3.7% over one year) is the leading cause of this downward trend. Excluding energy inflation, it is still 3.3%.
Another point to welcome was the sharp slowdown in the price of unprocessed food (+2.2% year-on-year in February compared with +6.9% in January and +13.9% a year ago) as well as in the cost of non-energy industrial goods, the increase of which no longer exceeds 1.6%.
This inflation is resuming a downward trend and will strengthen the European Central Bank debates regarding the timing of a first cut in policy rates.
The good news for our stagnating economies in recent quarters comes from the labour market. In January, the unemployment rate fell further, no longer exceeding 6.4%, indicating that households continue to have the means to spend.
We maintain exposure to European debt in our defensive and neutral portfolios.
US inflation remains strong
After falling sharply in the first half of 2023, inflation has remained broadly stable at a still too-high level. This delays the first cut in US policy rates, which investors have been expecting for months.
US inflation is slowing slowly. In February, the annual rise in consumer prices was 3.2% (compared to 3.1% in January). Compared to the previous month, prices rose 0.4%, the most significant increase since September.
The recent rebound in the price of a barrel has something to do with that. Energy prices recovered 2.3% month-on-month in February, compared to 0.9% in January. But core inflation is only slightly better. At 3.8%, it is undoubtedly down from 3.9% in January but remains too high in absolute terms.
Broadly speaking, after a sharp decline in the first half of 2023, US inflation has remained largely stable, moving relatively little. It continues to resist and is slow to return to the 2.0% target defended by the US Federal Reserve.
Together, these figures should reinforce the US Federal Reserve’s caution. The week before, Chairman Jerome Powell had hinted that she would give herself time to confirm inflation was under control and that this would give her the confidence to start cutting policy rates. He also suggested that confirmation not be delayed. But based on those numbers, we’re not there yet. A first cut in US policy rates at the June meeting remains our most likely scenario.
Meanwhile, the US economy continues performing well, with growth rates above Western economies.
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We continue to invest in bond and equity markets in the United States as part of our diversified portfolios.
Japanese inflation is less worrying
With a downward trend, inflation in Japan is widening the Bank of Japan’s room for manoeuvre, caught between pressures to normalize policy rates and an economy in recession.
Unsurprisingly, Japan was among the first industrialized countries to return inflation to target. In January, core inflation, which excludes fresh food products (whose prices can be highly volatile), posted an annual increase of 2.0%, in line with the Bank of Japan’s targets. The main index rose by 2.2%.
These figures allow the Japanese monetary authorities to breathe. Under intense pressure to raise their policy rates, thus tightening their monetary policy when Japanese inflation peaked at around 4% at the end of 2022, they limited themselves to widening somewhat the band in which another of their targets are: 10-year Japanese sovereign debt trading at around 0.0%. And in a country where household demand remains limited, the measures adopted seem to have sufficed.
Therefore, if normalization of the rate policy is possible (and desirable), it should not be a priority in a context where Japanese growth is still struggling. The fourth quarter of 2023 ended with a 0.1% decline in GDP compared to the previous quarter, which ended in a 0.8% decline. Even if the Japanese stock exchange is celebrating, the Japanese economy is in recession. Two factors support its performance: first, the weak yen strengthens the competitiveness of Japanese companies and makes the country’s financial assets cheaper.
To this is added the improvement of the governance of Japanese companies, the local regulator deciding to put pressure on those who do not put the cash they have at the service of the company or its shareholders.
We continue to invest in Japanese assets across all of our portfolios.