Executive summary
This week, we look at three critical issues:
- Eurozone GDP: Steady despite Germany's economic sputtering. The Eurozone economy grew again by a robust +0.3% q/q in Q2 2024, slightly exceeding our own forecast. France (+0.3%) and Spain (+0.8%) performed better than expected, while Germany (-0.1%) was again weak as expected. Going forward, we expect Eurozone growth slightly above potential, supported by consumption and investment, given rising wages and remaining NGEU funds. Inflation in July surprised on the upside, inching up to 2.6% y/y (core 2.9%), given ongoing price pressures in the service sector. We therefore stick to our call of only one more cut by the ECB in 2024. But the next inflation readings must prove that the latest print was just a hiccup and not something more structural.
- Will depreciating the dollar shrink the US trade deficit? With the dollar at its highest in more than 40 years, tariff policy is unlikely to be enough to solve the US trade imbalance. On the campaign trail Donald Trump’s inner circle has put forward the idea of a new Plaza Accord (22 September 1985) to depreciate the dollar, raising inflation concerns among observers especially large US retailers. Such a bold move would take time and require the cooperation of other countries willing to intervene and strengthen their own currencies, which would not be easy to secure even if a reward is offered in the form of a reduction in tariffs or privileged access to the US market. Such a decision would also require the Fed to sign off on it since the Treasury does not have enough dollars to sell. While historical evidence shows that depreciating the dollar can have an effect, it comes with a lag, and would translate into US monetary easing at a time when inflation is not entirely under control. Such interventionist currency policy would question the existing and very credible monetary policy framework and thus the dominant currency status for the USD.
- Q2 earnings: A season full of what ifs. The current earnings season has showed mixed results, with some sectors outperforming (communication services, technology) while others struggle (materials). In the US, the S&P 500 is seeing moderate growth, but investor caution is evident due to concerns about future earnings and revenue potential. In Europe, the luxury market and cyclical industries are facing slowdowns, though banks are performing well despite economic uncertainties. Looking ahead, a combination of economic resilience and easing monetary policy is expected to support further earnings and revenue growth. However, potential market corrections remain a concern, particularly in sectors where valuations may be stretched.