REAL INDICATORS
Unity is strength. Even in an orchestra or choir: a larger workforce adds power and color at the sound. This is why in the seventh symphony Gustav Mahler foresaw the use of a thousand elements. The same happens in economics: the sectoral and territorial coherence increases the speed in the direction of travel, hopefully upwards.
And for an additional reason to the obvious one of the popular proverb used in the incipit: the greater productive activity of a sector or a territory translates into greater income and demand for them, which it is transmitted to other industries and other places, fueling activity, income and demand, which it bounces back strengthening the first impulse. In reality, the play of reverberations and references is multidirectional. A bit like what is observed at wavy way in the Giudecca Canal in Venice, caused by the passage of motor boats, whose wake bounces on the banks and comes back, intertwining in many ways and verses, creating a unique turbulence.
All this to say that, when the recovery expands in geographical and productive space, there is asignificant acceleration. And that's what's happening now globally. In fact, the manufacturing added its propulsion to that of tertiary which in the last two years has the fate of the post-lockdown recovery has endured, thanks to the revival of demand for travel and all the social activities, which had been held on pharmacological sleep to avoid greater infections in the months when SARS-CoV-2 was raging.
Meanwhile, industrial transformation suffered the three simultaneous shots of the disappearance of compulsive purchases of goods (especially for the house), when you couldn't spend otherwise, of energy shock and the rise of interest rates. Manufacturing, in fact, is more energy-intensive and is more affected by the convenience of debt purchases, as these are significant expenses, in the case of both durable consumer goods and instrumental goods (business investments).
Although many doubted that the tug of war (as the Lancet of July 2023 headlined) would have been won by the tertiary sector, and therefore the economy would not have experienced a recession, this is exactly what is happening. For three months now industrial production has started to increase again, and if at the beginning it might have appeared like the leap of a dead cat, it is now clear that it is a new ascending cyclical phase, with ongoing acceleration and the output component of the PMI at its highest since June 2022, while that of orders has been at its best since May of that year. And there are various explanations of this: i energy prices have come down a lot from the peaks, theexcess inventory compared to demand was reduced and the greater cost of money has entered the normal calculation of the convenience of families and businesses. Furthermore, the industrial policies are pushing to embrace the digital and green revolutions, and to change the geography of international dependencies, in the name of friendshoring. Which, to paraphrase Carl von Clausewitz, is the continuation of the trade war by other means.
The recovery in manufacturing has numerous implications, because it means that: i Current rates are bearable for economic systems, there will be greater demand for raw material and therefore tensions on their prices, the increase in employment will expand, with effects on unit wages and on family consumption, there will be more international exchanges, as industrial companies are included in global value chains, so much so that two thirds of international trade is made up of semi-finished products.
While, services keep pace and indeed they will find new fuel in the demand coming from the industry itself. While the Tourist spending remains on the rise to regain 2019 levels (international arrivals worldwide closed 2023 at +33% on 2022 but still at -12% compared to pre-pandemic). And that's not to say they aren't destined to surpass them big time, wars permitting (and the news of troop movements in Lithuania, the increasingly insistent declarations on the need for European countries to prepare for the conflict, and the rumors of an Iranian attack on Israel make us tremble); overcome them both to regain trend values and because it is very probable that travel has risen in consumer preferences, so that their greater frequency is more popular than the purchase of a new car, especially with the moonlight on the transition to electric which creates a lot of disorientation among buyers.
In strengthening the resumption of the cycle the harmonious intonation ofgeographic ensemble it is equally important as sectoral chorality. And in March, finally, there was no macro area or large economy on a global scale whose production did not rise. In terms of pace, India in the lead, followed by the China (the giant that contributes most to the increase in world GDP), from Japan, By USA and, bringing up the rear, fromEurozone. In which, in reality, without the still sloppy performance of France and Germany (on whose difficulties the latest Lancets have sunk), the pace would have been much higher, and which has once again emerged from the contraction thanks to the Spain and, listen, listen, toItaly, the last that becomes first.
It's almost unanimous now another choir, that of those who praise the Italian performance after the abrupt interruption in March-June 2020. Even the Nobel Prize winner Paul Krugman highlighted it in a recent graph (shown below) in which he shows how Italian GDP exceeded the level of end of 2023, with a performance second in the G4 only to the USA and Canada.
The Lancets have already underlined this several times the metamorphosis worthy of the fairy tale of the ugly duckling, Andersen's masterpiece which today is banned by the pedagogically correct. We will certainly return soon to retrace the structural and contingent reasons for this unexpected performance, including the “monstrous” super construction bonus, which everyone talks about but which few know and even fewer understand. Incidentally, without thesensational increase in investments in housing (+72%; even in the credit and real estate bubble of 2000-2006 it “only” +24%) and in the construction activity, which that bonus fueled, the post-pandemic recovery of Italian GDP today it would be more or less where the French one is, a little better than the German one and worse than the Spanish one (although not taking into account the multiplicative effects of such investments), and then goodbye investors' second thoughts about the sustainability of public finances Italians and narrowing of the spread.
Now and here we merely suggest that the figure placed in the DEF just fired of 2024 GDP increase (+1%) is likely to prove itself too cautious, rather than too optimistic as we have read in the comments of some authoritative economists, both because construction activity will continue on pace to complete the works financed by the superbonus until at least the summer, and because Italy will join the global industrial recovery .
INFLATION
Quo vadis? It is the key question, from many points of view, for the future path of inflation. And one of the key phrases from Henryk Sienkiewicz's book comes to mind, from which the colossal film of the same name was based with Peter Ustinov's masterly Nero: «The world lives on deception and life is an illusion. The soul is also an illusion."
È reduction is an illusion of the dynamics of consumer prices? Statistically, absolutely not. The annual variation is very low from the peaksi: from 12,6% to 1,3% in Italy, from 10,6% to 2,4% in the Euroarea and from 9,1% to 3,5% in the USA. Current peaks and arrival points are respectively lower and higher if we look at the core index, which is more affected by domestic inflation factors (labour costs and company margins).
Just thecore inflation it makes us understand that economically disinflation could be illusory, in the sense of not reaching completion as the central banks would like and disillusioned investors. A well-founded fear?
To answer we need to look at all the ingredients that make up the inflationary mixture, and distinguish by latitudes.
The first is the cost of raw materials. For a few months, i.e. since manufacturing awakened, some have returned to tension. A question of demand, certainly, to which the geographical chorality described above contributes. But in many cases it is also a question of supply. For example, in the case of the queen of raw materials, the Petroleum, the continuation of OPEC's policy of cuts creates a shortage that even allows Russian crude to be sold at US$75, against the ceiling of US$60 set by the G-7. Added to this is the fear ofescalation of the Middle Eastern conflict. So the price of black gold has risen by 21% since the beginning of the year, and could rise further if demand picks up as much as the stronger recovery suggests. This will cause the disinflationary contribution played so far by the energy bill to disappear, which is actually now pushing consumer prices back up. And this also applies to the gas, with Egypt which from a net exporter has become a net importer and with Indonesia which, while remaining a large exporter, will have to appear on the markets to purchase what is needed to satisfy internal demand and cover the lower extraction.
And then also other raw materials are again in tension: from cocoa (+166% from the beginning of 2024, due to fungal disease; fortunately it is not a fundamental part of our diet, although delicious) to copper (+19%, but it could only be the beginning because It is used in many industries). It is true that other prices have fallen or remain weak: from iron ore to wheat, from soybeans to sugar. Overall, if things go well, non-energy raw materials will no longer help to cool inflation. Although the weakening of the euro against the dollar is penalizing for us.
The second ingredient is the trend of cost of labor. The qualitative indications, extracted from the press releases of the PMI surveys, say that the wage pressures they remain strong almost everywhere, in particular in the USA, UK, Canada, India, Italy, France, Germany and Spain. In some places they went up, in others they didn't. The numbers tell a similar but not the same story: the salary increases they are still lively, although slowing down. For example, the annual variation in wages offered is falling, but remains incompatible with inflation at 2%, unless there are strong productivity gains, which seem at home in the USA and less so in the Eurozone.
Where the data supports the analysis, that is, in USA, the picture is confirmed as a slowdown in labor costs, whatever parameter is used. But the the downward path of the velocity is asymmetric compared to the ascending one and the strength of the labor market could negate a further significant slowdown.
The last ingredient is la robustness of demand what a bigger delivery pricing power to businesses, and therefore to pass on higher costs to customers or even increase margins. On this point, what was said above about the acceleration of the recovery applies, and therefore there is not much to be comforted on the inflationary front (although there can be much comfort on that of employment and family income and consumption).
A great consolation, however, can be drawn from inflation expectations one year, which American consumers have seen at around 3% for four months now (after reaching 4,5% in November), only a few tenths above the values prevailing in the three-year period before the pandemic, and which even in the Euroarea are to 3,1%, a sharper decline. While businesses in Italy, in the Bank of Italy's quarterly survey, they expect consumer prices to rise by 1,5% in the coming months. We hope that expectations, greatly influenced by the latest trend, will not be disappointed.
RATES AND CURRENCIES
The good news on the "recovery and resilience" ofamerican economy have pushed back in time the longed-for moment of drop in US rates. The market calls for a decline, and the call longs like that of Saint Augustine who asked the Lord to be chaste; “but not immediately”, replies the Fed, mimicking the second part of the Saint's plea. And It's hard to blame the Fed: if high rates – both short and long term – don't seem to have damaged the economy, what's the rush to lower them? Even more so since i commodity prices they are going back up and, together with the wage pressures that give more purchasing power to those who work, make us think that the last mile of disinflation will be the most difficult. And, of course, the Fed she is also concerned about the American public deficit, which the Fund estimates for the past year (structural balance) to 8,8% of GDP (don't tell the accountants in Maastricht, they'll have a fit...), and still see it above 7% between now and 2028... In the problematic ranking of the weight of public debt in relation to GDP, United States they are now in third place, and close behindItaly (silver medal). At the top of the podium there is, as we know, the unreachable Japan.
In the last month 10-year bond rates therefore rose again, on both sides of the Atlantic, but more to the West than to the East of said ocean, as is appropriate, given that the 'fault' for this increase lies more in America than in Europe. Because the yields of Waist e btp? There wasn't much reason for them to follow the T Bond. The problem is that, in the communicating vessels of world finance, dollar rates 'communicate' more than anyone else. And the Lagarde, which kept rates steady and promised them to fall in June, had to say. “We follow the data, not the Fed.” Anyway, it spread Italian, both compared to the Bund and compared to the Bonos of the Spanish cousins, continues to be low: reflects both the (relative) strength of our economy and the prudence in the management of public finances. Giorgetti did well to postpone the programmatic part of the DEF projections until September. What's the point of struggling now, when we don't yet know the details (where, precisely, the devil resides) of the new rules?
Let's go back toAmerica. We said above: "high rates - both short and long term - do not appear to have damaged the economy". Which seems to contradict textbooks, which explain how the economy should instead be damaged, given that the high cost of money discourages installment sales and the purchase of investment goods via debt. We have already observed, however, in last month's "Lancette", that what matters, for the impact on the economy, is not only the interest rates, but a larger quantity that economists call 'financial conditions'. The two concepts – we wrote – “should, in theory, influence the economy passi passu: if rates increase the stock market is not happy, and both the cost of debt capital and the cost of risk capital increase, and vice versa. But, moving from grammar to practice, things are not always like this."
The graph illustrates, for the Use, the different trends of guide rate of the Fed and financial conditions (represented by the Federal Reserve Bank of Chicago index: “National Financial Conditions Index”, which collapses 105 indicators of financial conditions). And these different trends can explain why, since the Fed began its restrictive crusade (bringing the Fed Funds from zero to 5,3%), Wall Street it went up instead of down. As can be seen, initially the 'crusade' led, in turn, to a stiffening both of monetary policy (as represented by the cost of money) and of monetary conditions broadly (which also includes what happens in credit markets, spreads, the 'shadow banking system' and exchange rates). But then, starting roughly from 2023, financial conditions have become increasingly permissive, while the key rate continued to remain glued, like tenacious ivy, to the high level reached. And all this helps to explain why the Fed Don't be in a hurry to reduce rates.
If the Fed is in no hurry and the economy holds up well, why does the yield curve should it be reversed? If it were to return to normal, the T-Bond yield should at least fall to the short-term rate. The curve - see graph - actually shows signs of wanting to normalize. Which is a bad omen: certainly for the market of bond, and perhaps also for the MY BAG, who is vulnerable, if only because he ran too much.
La ECB, we said, has basically promised a drop in rates in a couple of months. And, if we add the prospects - upwards - of the yields of T Bond following the Fed's lack of haste in lowering rates (and there are even those who assign some probability to a possible move to increase them!), this divarication will have consequences on dollar/euro exchange rate? In theory, yes: an increase in rate differential (increase visible already today, both for nominal and real rates) will add up to a growth differential in favor of America. However, markets usually anticipate this what seems like an obvious reason towards dollar appreciation. The greenback, despite the recent strengthening, remains in the fork 1,05-1,10 where it has been installed for more than a year. It may be that the markets fear a sharp strengthening of the dollar, which would lead to currency crises in emerging countries and hard blows to those (and there are many!) who are indebted in dollars.
It is Yuan? The Chinese currency, which was discreetly helped by the authorities, depreciated against the dollar by around 5% compared to a year ago, but has strengthened compared to the weakest point (7,34) reached last July. And improved growth prospects, as well as President Xi's efforts to improve China's image, recommend gearbox stability.
in currency markets we must note the trend of Yen, which at the end of March recorded its weakest point - against the dollar - for 34 years. And this despite the increase in rates (so to speak, they 'increased' from below zero to zero) decided by the Bank of Japan. Reading the 'justifications' for this depreciation, it turns out that it is due to the fact that Japanese rates continue to be lower of others; which is true, but it was also true before and indeed, after the increase, the differential decreased. The Yen is traditionally considered a refuge money, but there are no reasons why it should now be a 'less safe haven' currency than before. Sometimes we must give up understanding what happens in the bowels of the markets.
Then there is the Swiss franc, which has lost ground both because the Central Bank lowered key rate (motivating the drop in rates with the drop in inflation), and because decided to stop reducing foreign assets that he had in his belly, and that he had accumulated when the Bank defended the peg with the euro. In short, the devaluations cause problems, but also the revaluations I'm no different. When are we going to have one single world currency, so that we no longer have to scratch our heads commenting on the roller coaster of the currency markets?
Another puzzle is thegold, another safe haven asset. There must be many intent to take refuge in the world, to justify a increase of almost 20% in the space of a month and a half. In reviewing the 'usual suspects' of gold movements, we cannot find a justification for such a large and concentrated tear over time. For resize the exploit, however, we note that, making 100 on February 2022 (Russian invasion of Ukraine), gold reached 127,2, but the EUR50 index recorded 128,0 and our MIB 134,1…
Stock markets? We have long been rooting for long-term recommendations. In the short term, after having broken many records, we advise caution: caveat emptor! And, finally – last but not least - the Bitcoin: it made sparks and, having always reached 100 in February 2022, today it is at 176,3, and is worth more than 70 thousand dollars. Also here, Caveat emptor: a Deutsche Bank survey of individual investors gave the following results: only 10% see Bitcoin above 75 at the end of the year; a third sees it under 20 thousand, and 38% think it will disappear completely in the next years. Again, best wishes…
