PARIS (Reuters) – Central bank action is starting to weigh on inflation momentum in developed countries but has yet to trickle down to labor markets, which could push for further monetary tightening this year, we estimate at Axa IM.

“Developed central banks are now facing a fog of demand: economies are slowing down, but not labor markets,” observed Gilles Moëc, chief economist at Axa IM, during a press conference.

In the United States, underlying inflation is slowing down sharply, to 5.5% over one year in April, but it should only be marginally lower than 4% at the end of 2023, estimates the economist, who underlines the signals contrasts sent by the labor market with rising hourly wages and falling weekly wages.

The euro zone is facing a similar situation, with an entry into recession while the peak in wage growth has not been exceeded. Axa IM estimates that the peak will be reached in the third quarter of this year, at more than 4.5% growth over one year.

“Central banks want to ensure that their monetary policy is transmitted to the labor markets before lowering rates,” said Gilles Moëc, who sees this as the central theme of 2023.

In this context, corporate margins are bound to shrink further, even though the consensus observed by Axa IM is banking on an increase in profits, supporting the valuations of European and American equities.

“After a very depressed feeling at the end of 2022, European markets are again enthusiastic, which means that the surprises will now be negative,” commented Laurent Clavel, head of multi-asset at Axa IM.

“In the US, the AI ​​craze is pushing tech stocks into overbought territory, with non-tech stock indices down since the start of the year,” he adds.

Conversely, emerging equities and debt could benefit from the advance in the cycle taken by developing countries, which have leeway to lower their key rates in order to support their growth.

(Report Corentin Chapron, edited by Blandine Hénault)

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