Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Head of Macro Analysis
Summary: The results of the monthly survey of purchasing power show the eurozone economy is resilient despite the spread of the new Omicron variant and higher costs. Expect GDP growth to be slightly weaker this quarter. But there is a bright side: manufacturing problems continue to ease and the German economy has rebounded in January after a weak end of 2021. The inflation headache remains but we doubt the European Central Bank (ECB) will act anytime soon to counter inflationary pressures. Over the past few days, several Governing Council members (Klaas Knot, Gabriel Makhlouf for instance) have clearly stated this is too premature to withdraw stimulus and hike interest rates.
Supported by an adequate fiscal policy, accommodative monetary policy and eased financial conditions, the eurozone economic recovery continues in early 2022 but at a slower pace than in 2021. Eurozone manufacturing is going from strength to strength. It improved further from 53.8 in December to 55.8 in January. Manufacturers mentioned two positive factors: less shortages for critical inputs and easing of transportation delays. From an inflation perspective this is positive because it reduces the upward pressure on producer price growth, though it does not disappear. Other factors are contributing to push inflation higher, such as energy costs and wages in some countries. There are pending issues too, for instance backlogs of work. It will certainly take months for businesses to realign production with demand, especially if demand remains strong. As the services sector was hit by restrictions implemented to contain the Omicron variant and the services PMI reached a 11-month low, the composite output PMI declined to 52.4 in January from 53.3 in the previous month and slightly below market expectations of 52.6. This is the second consecutive month of slowing growth. We consider growth still remains well-oriented in the eurozone. But there is a change of momentum. GDP growth is likely to be lower than expected this quarter. Some countries will surprise on the upside (Germany for instance) while others will disappoint (France).
Key details from the flash PMI report: