The economic downturn in the euro area could turn out to be milder than feared a few months ago. That is one message from today's January PMIs, which once again surprised on the upside. At the same time, however, it is also clear that the descent from the inflation peak will be a slow and rocky one. The published figures point towards a milder phase of economic weakness, while underlying inflationary pressures remain elevated. An environment that certainly does not argue for a slower pace at the next interest rate meetings (which we do not expect either).
The de facto (almost) guide-less state of affairs in euro/EU fiscal policy in recent years is not to become permanent. The reforming of the Euro Stability Pact is going into the next round. The EU Commission will soon present reform ideas. The guiding principle shall be: less stringent rules, but focus on implementation. In addition, state spending should be divided into "good" and "less good" ... a move that may give rise to "greenwashing" risks.
Easing of supply chain problems have allowed industrial companies to work through their well-filled order books in the past few months. However, the high order backlog is merely a reflection of past demand and thus a look in the rear-view mirror. The outlook, on the other hand, is not very encouraging. An industrial recession is around the corner, with inflationary pressure & supply-side bottlenecks having passed their peaks probably the only encouraging pieces of information contained in most recent PMI releases.
At full allotment tomorrow (Tuesday, 9 Aug), OeBFA's 2022 funding progress would reach about 72% of our expected RAGB issuance target for the FY. Apart from the somewhat lower issuance amount target and the attractive valuations of both sovereign bonds versus most peers, the popularity of the benchmark 10-year bond and the scarcity value of the 2044 RAGB should outweigh any potential supposed holiday-season-related weakness of demand.