Executive summary
This week, we look at three critical issues:
- ECB: rate cut round two. At its next meeting on 12 September, we expect the ECB to lower the deposit rate for the second time this year to 3.50% after a pause in July. With inflation dropping to 2.2% y/y in August, loosening the restrictive stance is justified. Going forward, the ECB will follow a gradual cutting cycle, reaching a terminal rate of 2.5% in mid-2025. However, with record low unemployment, strong wage growth and sticky core inflation, the ECB is not in a rush and is likely to emphasize a careful data-dependent approach.
- Chinese equities: reaching for rock bottom. China's earnings growth and equity markets have struggled in 2023 and 2024, hindered by weak consumer demand, the still-present real estate crisis and geopolitical tensions. Despite government efforts to stabilize the economy, over 50% of companies missed earnings and revenue expectations in Q2, particularly in key sectors such as consumer staples and technology. Capital outflows and reduced transparency on foreign investments have further dampened market sentiment. However, economic stabilization paired with the accelerating earnings rebound is likely to keep Chinese equity returns in the green for both 2024 and 2025, supported by continued policy measures, rate cuts and fiscal spending. With further economic stabilization expected in 2026, Chinese equities could see stronger double-digit returns in the future, presenting long-term opportunities despite the short-term risks.
- Commodity prices: cooling down but not for power, especially in Europe. Despite alarming headlines across the globe, most commodity prices are on the mend either because supply is strong (grains) or because the demand outlook is weaker (oil, metals). Some outliers remain, such as coffee or cocoa, but they do not pose a significant inflationary risk. Going forward, we expect prices to continue to consolidate for most commodities. In particular, we expect oil to continue to trade in the 75-85 USD/bbl range. Natural gas prices in Europe, and consequently power prices, remain an issue for inflation. Concerns over supply and weather conditions ahead of winter are making markets nervous, despite plenty gas in storage (above 90% of capacity). Nevertheless, we expect retail power prices to remain broadly stable. Indeed, we believe either governments (which are under fiscal pressure) may take advantage of lower wholesale prices to recoup some of revenues lost over 2022-2023 by increasing taxes and levies to pre-2022 levels or they may keep them low at current levels in case of a market accident, all of which would be rather neutral for consumer prices.