News of the week summary - 07/02/2023

US Economy loses momentum but stays resilient

The latest data from the United States paints a picture of an economy losing momentum, with cooling inflation and stagnant consumer spending. The personal consumption expenditures price index, a key inflation gauge for the Federal Reserve, increased by just 0.1% in May. The year-on-year figure also dipped to 3.8%, the lowest in over two years. When excluding food and energy, the core price consumer index increased by 0.3% from the previous month, and 4.6% from May 2022. This indicates that underlying inflationary pressures remain, making economists skeptical of a relief from high prices.

Consumer spending, when adjusted for prices, showed minimal change. From February through May, household spending essentially stalled after an earlier surge. Services spending increased while spending on merchandise dropped. Despite high prices, low unemployment and steady wage growth have encouraged some Americans to continue spending. However, others are turning to credit as their pandemic savings dwindle, and delinquency rates are on the rise, signaling underlying fragility in the economy.

The Federal Reserve (the American central bank) is expected to resume interest rate hikes in the near future, with some officials indicating the need for two more rate increases this year. The employment situation and other economic indicators will play a crucial role in the central bank's decision.

ECB considers selling the bonds it acquired through QE

European Central Bank officials are considering accelerating the reduction of the bank's €5 trillion bond portfolio, with some advocating sales of securities from the portfolio, while others suggest phasing out bond reinvestments. The ECB has been winding down its unconventional measures (known as Quantitative Easing which consist in the puchase of bonds by the ECB to lower yields, and Qualitative Easing which consists in the purchase of low quality bonds by the ECB to reduce pressure in the market) as inflation surged. While the ECB has already stopped net asset purchases and has been reducing its bond portfolio, officials are exploring additional measures.

One option being considered is active sales of securities from the €3.2 trillion Asset Purchase Program, accumulated during a period of low inflation. Such sales could occur after the full repayment of cheap long-term financing provided to banks during the pandemic. However, there are concerns that these sales could result in significant losses at some euro-zone central banks, which initially bought the bonds at low yields.

Inflation cools in the eurozone

Inflation in France has slowed to a 14-month low, with the annual consumer-price changes standing at 5.3% in June, down from 6% in May. This data provides some signs of improvement. Italy, Belgium, the Netherlands, and Spain also experienced slowing inflation, with Spain even falling below the European Central Bank's 2% target. However, Germany's consumer-price gains accelerated.

ECB President Christine Lagarde has stated that the ECB's future policy decisions are contingent on the inflation outlook, the dynamics of underlying inflation, and the strength of policy transmission. Barring significant changes to the outlook, the ECB is expected to raise rates in July. However, officials are still debating whether to raise rates again in September as they assess the strength of underlying price pressures.

Insee's publication for French data showed that services prices rose 2.9%, slowing for a second month, while manufactured-goods inflation accelerated to 4.3%. The rising cost of living is impacting consumers and is expected to result in lackluster economic growth in France. Insee also reported that household spending in France increased by 0.5% in May, slightly below expectations.