These comments from the Chairman of the FED in Minneapolis, who is known as the most dovish member of the FOMC, were made last week in reaction to the good inflation figure for July and sound like a wake-up call. While July's CPI inflation rate has indeed slowed sharply, below expectations (+0% month-on-month versus +0.2% expected and +1.3% in June), even for its Core component (+0.3% month-on-month vs. +0.5% expected and +0.7% in June), it is important to keep in mind that prices of services (supported by strong tensions in the labor market and related wage increases) and food products continue to rise (see the chart of the week). Neel Kashakari even added that it would be necessary for the FED to raise its key rates to 4% this year and to continue in 2023 towards 4.5%.
The markets did not care and continue to expect a reduction in key rates in the second half of 2023! In the short term, the scenario of a 50 bps rate hike at the FOMC in September is the consensus scenario. While this slowdown in the CPI is good news and clearly supports this feeling of summer euphoria (illustrated by the Nasdaq index which has recovered more than 20% since its low point on June 16), which we will not complain, it seems more reasonable to wait for the Jackson Hole symposium which will take place at the end of August to better understand Jerome Powell's state of mind. This summer enthusiasm would indeed almost border on carelessness and is reminiscent of the dialogue between Andromaque and Cassandre in the play by Jean Giraudoux: "The Trojan war will not take place, Cassandre! Andromaque says to Cassandre in the first line of the play, to which Cassandre replies, "I have a bet for you, Andromaque." ".
As indicated in our last meeting on Monday, it therefore seems far too early for us to get carried away. While the monthly consumer price figures (CPI) have confirmed the summer bear market rally, the start of the new school year could be tougher as it is clear that the markets are misjudging the persistence of inflationary pressures (upward pressure on rents, which will take time to weaken, and on the prices of services in the USA; the energy crisis in Europe and the strength of the dollar, etc., and the imminent resumption of an upward movement in long rates seems very likely to us. Released today, the latest data on the US housing market confirming some contraction (with housing starts falling 9.6% seasonally adjusted last month) and those on production industrial sector, clearly on the rise (from +0.6% in July, above expectations at +0.3%), does not provide any particular key to reading. Also, in terms of equity exposure, we are preparing for the start of the school year by getting ready to reduce the Growth component of our allocations (driven by an exceptional month of July) in favor of more defensive factors: Quality and High Dividend.
However, let’s not play the Cassandra on this sensitive terrain of inflation! Indeed, concerns about global growth, reinforced earlier this week by bleak data from China (where the central bank cut two of its main policy rates by ten basis points after industrial production and sales figures in the retail below expectations) and in the USA (decline in the NAHB index of confidence of real estate developers for the 8th consecutive month, to the lowest since 2014, and contraction of the manufacturing sector in the New York region according to the activity index "Empire State") should lead the FED to seek, as a priority, the achievement of the famous "soft landing". They encourage, at the very least, recovery plans on both sides of the Atlantic (Inflation Reduction Act adopted by Congress and government measures in Europe).
