2023-05-08 05:01:06
The Monthly Review by Nicolas Blanc, Allocation Manager at ELLIPSIS AM.
After the banking crisis that broke out in March in the US, the market regained its calm, thanks to the stated determination of the central banks to curb any contagion and to a context of positive publications, both in terms of the economy and of company results. While the economy continues to surprise with its resistance to rate hikes, warning signs of a slowdown are emerging.
The overall recovery in PMIs continued in April, bringing the composite to 54.4 in the eurozone, 53.5 in the US and 54.5 in China, levels very largely in expansionary territory. With regard to the US, however, it should be noted that the message given by the ISM is less optimistic, posting 47.1 and 51.9 for the manufacturing and services indicators.
China further benefited from the positive effects of the lifting of health restrictions, which unleashed strong demand for services. This is visible both in survey data and in real data collected at high frequency (such as car sales, air travel or theater attendance). Growth in Q1 was published at 9% annualized but this catch-up in activity could soon slow down, in particular due to the persistent weakness of the real estate and construction markets. Public policies have so far succeeded in cushioning the shock, but the adjustment to be made remains very significant, as this sector is facing major demographic changes. Real estate investment was released down 7% on an annual basis in March, while housing starts were down 29%.
In Europe, the positive shock constituted by the drop in energy prices and the normalization of production chains produced tangible effects on survey data, PMI and household confidence, as well as demand for services. On the other hand, the growth of only 0.1% of GDP in Q1 was a disappointment, which calls into question the reliability of the surveys. The geographical distribution of growth was concentrated in the peripheral countries, with Germany and France suffering from the drop in demand for manufactured goods. Finally, it should be noted that the unemployment rate has reached a new low point in the euro zone, at 6.6%, a positive element for the future trajectory of demand.
Activity in the US was above potential in Q1 but is showing signs of slowing down, with in particular retail sales down (-1% for the month of March, even if the level for the whole of Q1 remained broadly pupil). With, moreover, a contraction in manufacturing activity and a decline in productive investment, we could fear an imminent downturn in the economy, especially as the current banking crisis should weigh on the conditions for access to credit. However, it is difficult to be too alarmist in the short term, especially when considering the strength of the job market (the increase in payrolls of March having been published far above expectations).
On the inflation front, the month brought some rather reassuring news. In the US, the overall rise in prices fell below the 5% mark, with a significant contribution from energy. Beyond this volatile category, inflation core remains at too high levels but housing costs are finally showing signs of slowing down. In terms of wages, the situation is easing, with annualized quarterly growth slightly above 4%. The euro zone appears to be lagging behind, with inflation core which is only beginning to decline, to 5.6% over one year. The market is once again becoming quite optimistic about the fall in inflation, by evaluating, via swaps, the annual level to come at 2.2% in the US and 2.65 in the euro zone.
After the energetic measures taken on SVB and Signature Bank, the month of April saw the situation of the regional banks stabilize, until the stock market collapse of First Republic at the end of the month. Our analysis of the situation is that this crisis, as worrying as it is, is not systemic. Rather, it is a matter of localized management errors that the rise in rates has brought to light. Other weak players will sporadically be revealed and the volatility of regional bank valuations will remain very high, as long as the market has not assessed all the risks. Incidentally, the big American commercial banks are going to be net beneficiaries of this crisis, by recovering deposits and cheap assets. Lastly, this crisis should have a recessive effect on the American economy via the restriction of credit, but this effect replaces that sought by the monetary policy of the Fed.
Chart of the month
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The content of this document should not be understood as an investment recommendation nor within the meaning of the European Regulation on Market Abuse MAR no. 596/2014 of 16 April 2014 or within the meaning of directive mif2 2014/65/EU of 15 May 2014. Any instruments or issuers mentioned are intended solely to illustrate past situations and therefore developments in this context should not be understood as forward-looking. These opinions come from the expertise of the managers of Ellipsis AM, implemented in their management of funds and mandates. These portfolios may be exposed to the sectors, strategies and instruments mentioned in this document and future management decisions are not constrained by the comments and analyzes reported and may even end up in the opposite direction.
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