“Less precarious households do not appear to be altering their consumption habits, so service sector activity indices remain in expansion mode,” says Guy Wagner, Chief Investment Officer (CIO) of the asset management company BLI - Banque de Luxembourg Investments. “Activity indicators in the manufacturing sector are evolving less favourably, with industrial orders and real estate showing the most notable signs of weakness.” In the eurozone, hopes of accelerating growth were tempered over the past month “by the lack of confirmation of previous signs of improvement”. In China, exports remain the most dynamic component of GDP, while support measures aimed at household consumption and the property sector still do not appear to be sufficient to bring about an acceleration in economic growth. In Japan, the gradual easing of inflation and favourable wage settlements should lead to a reacceleration in household consumption, hitherto affected by falling real incomes.
When will the inflation target of 2% be reached?
Despite the moderation in inflation on both sides of the Atlantic, the question of whether and at what pace the movement towards the official 2% target will continue remains open. In the US, for example, headline inflation eased slightly from 3.4% in April to 3.3% in May. In the Eurozone, overall inflation fell to 2.5% from 2.6% in May.
Fed leaves key interest rates unchanged, ECB lowers them
In line with expectations, the US Federal Reserve left its key rates unchanged at its June meeting. Although inflation continues to ease, the Monetary Committee prefers to wait for more tangible signs of inflation returning towards 2% before initiating a less restrictive monetary policy. In the eurozone, the European Central Bank followed its guidance of recent weeks by cutting its key rates by 25 basis points at the beginning of the month. Nevertheless, President Christine Lagarde gave no clear indication of future moves, leaving open the question of whether this first cut will be followed by further reductions in the near future.
Uncertainties in France lead to higher bond yields in southern European countries
In the United States, the publication of inflation statistics confirming the moderation in price rises led to a slight easing in long-term interest rates for the second month running. “In the eurozone, political uncertainty in France following President Macron's dissolution of the National Assembly in the wake of the Rassemblement National's strong showing in the European elections triggered a pick up in the spread between German government bond yields and those of southern European countries,” emphasises the Luxembourgish economist. The 10-year benchmark rate fell in Germany, while it rose in France, Italy and Spain. Since the beginning of the year, the JP Morgan EMU Government Bond Index has fallen by 1.9%.
Positive balance for stock markets in the first half of the year
“Stock markets ended the first half of the year on a high note, once again posting significant gains over the course of the month. Driven by the leaders in technology and communications, many stock market indices, especially in the US, set new all-time records.” Only Europe's Stoxx 600 was down by 1.3% (in EUR), due to the underperformance of many European and especially French stocks triggered by the dissolution of the French National Assembly. “In terms of sectors, technology and communication services were by far the best performers, while utilities and materials declined over the month”, concludes Guy Wagner.