The double asymmetry between the United States and the euro zone

There is now a double asymmetry between the United States and the euro zone that will have big implications for financial markets: A first asymmetry stems from the situation of the labour market: the participation rate is now significantly lower than before the COVID crisis in the United States, whereas it has remained at the same level in the euro zone. This fall in the labour supply in the United States , and not in the euro zone , can be expected to give rise to significantly higher wage inflation in the United States; The second asymmetry stems from the central banks’ behaviour. The Federal Reserve wants to exit its highly expansionary monetary policy, albeit cautiously and partially. The ECB, meanwhile, apparently has no intention to exit its policy. Evidently, it wants to use a highly expansionary monetary policy to offset the loss of purchasing power caused by the rise in energy prices, boost the employment rate and facilitate the energy transition. Given the combination of these two asymmetries, monetary policy is likely to be more expansionary for a long time in the euro zone than in the United States. So w hat to expect? A depreciation of the euro against the dollar (which is already clearly visible), due to significant bond capital flows from the euro zone to the United States; A catch-up in euro-zone asset valuations (equities, companies, real estate) with those in the United States, thanks to lower real interest rates relative to the growth rate in the euro zone than in the United States. We draw conclusions from these mechanisms for asset allocation.