Jeroen Blokland

After consistently recording fat pluses over the past decade, the euro area’s trade balance has sunk deep into the red. For years, international trade contributed substantially to economic growth in the euro area. But: “Das war einmal”.

A historic surge in expensive energy imports now that gas supplies from Russia have been completely cut off results in a heavily negative trade balance. As a result, trade is now dragging down growth and pushing up the already sky-high risk of recession further.

Activity in the US housing market is rapidly declining. New home sales fell more than 12 per cent in July, the biggest drop since February last year. It was also the sixth decline in seven months. Compared to the peak, 51 per cent fewer new homes were sold.

In retrospect, we can say that central banks used the annual Jackson Hole symposium to revive their credibility as inflation fighters. This also applies to the ECB.

After yet another higher-than-expected inflation rate - we are now at 9.1 percent - and core inflation at a new record of 4.3 per cent, the ECB Governing Council on Thursday has adopted a record interest rate hike of 75 basis points.

With China using interest rates again to defuse the property crisis, and the Federal Reserve making clear in Jackson Hole that it will continue to tighten, the divergence in central bank policy between the two largest economies is increasing. This is not good news for the yuan, emerging market currencies and equities.

It was a huge shock. The 37.2 percent increase in German producer prices, or PPI, for July that the Statistisches Bundesamt announced last week. Not only was this the biggest price increase ever, it was also more than five percentage points higher than the consensus expected.

Moreover, this number came before reports of the 50 percent increase in German electricity prices so far in August. And so the question arises, should we be getting ready for a German inflation, or CPI, of over 10 percent?

Valuation is often not the immediate trigger for a stock market turnaround. But it is a decisive factor in the amount of upward or downward potential for the market.

Re-rating

Since its low point in mid-June, the S&P 500 Index has risen 18 per cent. Over the same period, earnings per share rose by less than 2 per cent. There has thus been a considerable re-rating of equities over the past two months.

The US macro data show a mixed picture. GDP – before revisions at least –  has contracted for two quarters in a row. For Europeans, that is a recession.

The ISM Manufacturing index fell further, but is still above 50. ISM Services unexpectedly rose to 56.7. More than half a million jobs were added in July. And yet it has felt like a recession for a while.

Retail giant Walmart issued another profit warning last week. And the underlying reasons point to a stagnant US economy.

Walmart pointed to a change in the spending pattern of American consumers. As a result of the continuing rise in food prices, Americans have no money left for other purchases. In order to get rid of the increasing stock, Walmart has to lower its prices considerably, which results in lower profits.

And then things moved fast. Business confidence fell to worrying levels in July, making a recession, especially in Europe, seem inevitable.

The S&P Global Flash Composite (Manufacturing + Services) PMI for Germany fell to 48.0. Well below the “magic” level of 50, seen by many as the line between economic growth and contraction - even though the actual level of negative GDP growth is considerably lower. The Manufacturing PMI also fell to 49.2.

The earnings season has only just begun, but we are already seeing some examples of what will become a trend: fewer companies beating expectations.

Investors like to be positively surprised, so companies tend to be overly cautious in their expectations so as not to disappoint those same investors. But when the economy is heading for recession, expectations are met less often and this earnings season is probably the first indication of this.