Investors’ attention continues to focus on inflation figures in the United States, which exceeded expectations for the third month in a row.
There is no real reacceleration of American inflation, but a stabilization around 3.5% to 4.0% in annual variation, a level higher than the central bank’s objective and consensus forecasts.
The interruption of the downward trend in inflation combines and demonstrates the vigor of economic activity. Even in recent weeks, US macroeconomic statistics have generally surprised the consensus, leading to an upward revision of growth forecasts for 2024 which now stand at 2.4%, a level comparable to that recorded in 2023.
As a result, the Fed’s monetary policy expectations were readjusted, leading to a rise in bond yields.
At the end of 2023, given the marked decline in inflation in previous months, money market futures suggested a first rate cut by the Fed as early as March.
These expectations were gradually revised. The Fed’s rate cut cycle has been postponed (the market now anticipates the first cut in September) and its magnitude has been reduced (the market is pricing in an overall cut of 150 basis points by the end of 2025, from 5 .5% to 4%; at the start of the year, the final expected rate was 3%).
Expectations regarding the ECB are more stable, with inflation and economic growth lower than across the Atlantic. Inflation in the euro zone fell further in March, standing at 2.4% year-on-year (2.9% for the underlying indicator).
Growth forecasts for 2024 stabilize at 0.5%, in line with that recorded in 2023. Monthly statistics confirm that economic activity is gradually recovering, moving away from the risk of recession.
That said, growth in the region is significantly lower than that of the United States and the pace of the previous cycle. For the ECB, expectations seem to be consolidating around a 25 basis point rate cut at the June 6 meeting, followed by similar movements in the following months, bringing the deposit rate to 2.5% at the end 2025 compared to 4% currently.
In the coming weeks, after the Fed meeting on May 1, attention will be focused on the inflation figures in the United States (May 15) to determine whether there is reason to consider that the postponement of the Fed’s rate cut is approved or not.
In the euro zone, it will be necessary to assess the impact of the recent rise in the prices of oil and industrial metals, combined with the fall of the euro, on inflation, which could modify expectations relating to ECB interventions in a less accommodating manner.
The impact of geopolitical issues on the market remains limited for the moment. Tensions in the Middle East have generated volatility in the price of oil, which was already on an upward trend due to the resumption of global growth. The US presidential elections in November are still considered far away.
While China plays a modest role overall in terms of foreign policy, it is working to calibrate its economic stimulus measures to keep it on a path of non-inflationary growth by aiming for 5% annual expansion.
The postponement of the rate cut in the United States is pushing up American bond yields and, by contagion, those of the euro zone, despite unchanged expectations regarding the reduction in ECB rates.
The unfavorable development since the start of the year does not call into question the attractiveness of the medium-term bond markets, particularly with regard to short and medium maturities.
Indeed, it must be considered that it is not envisaged a resumption of the rise in rates on the part of central banks, but a postponement of the start of the reductions and a reduction in their overall magnitude.
And the longer central banks maintain rates at their current levels, the longer the investor will collect high short- and medium-term coupons that exceed inflation.
Furthermore, longer maturities, in the current context, should primarily be seen as an insurance policy against the possibility of a future macroeconomic slowdown. Insurance that pays the policyholder (not the other way around) in the form of positive real rates. Hence the preference for real securities (indexed on inflation), despite the high volatility of prices.
The return of unfavorable volatility on the bond markets was well tolerated by the equity markets, which were nevertheless subject to profit-taking during the first half of April, after a bullish first quarter.
The uncertainty surrounding monetary policy decisions, if it persists, could bring some volatility back to stock markets. This reminds us of last September/October, during the last real correction in the equity markets, when the “High for longer” theme (the hypothesis of central bank rates remaining high for longer than expected) led to contagion in the bond markets towards the actions.
After such a positive first quarter for the equity markets, a pause for reflection is possible and the relaunch of the debate on inflation and rates in the United States could be the right pretext.
However, the medium-term outlook for equity markets remains positive. The reason inflation is struggling to fall in the United States is the strength of the underlying economy, which ultimately supports corporate profits and the upward trend in stock markets.
 the Fed – Perspectives The Globe by Eurizon){kind=link}