flash markets edram
-
Core inflation in the United States has slowed more than expected.
-
In the United States, investors are now expecting a reduction in key rates in June rather than October.
-
The lull in American sovereign rates has allowed equity markets to regain some color, with notable outperformance of European indices.
While the financial markets were beginning to run out of oxygen, suffocated by the extremely high levels reached by sovereign rates and in particular real rates, the publication of the American CPI index brought a breath of relief this week. Underlying inflation has indeed reassured by slowing more than expectations (+0.2% month-on-month versus +0.3% expected; +3.2% year-on-year versus +3.3% expected), notably thanks to its non-housing services component particularly monitored by the Fed. These positive signals helped to slow down the deflation of expectations regarding key rate cuts, with the next one now expected in June by investors (compared to October before this week's figure), which fueled a significant relapse in US sovereign rates. (10 years: -16 bps to 4.60%). The members of the Fed who have spoken in recent days have also welcomed this progress, in particular Christopher Waller who was particularly accommodating by mentioning the possibility of a rate cut from the March meeting, with a total of 3 reductions in 2025, a position which is however far from being consensual within the Governing Council. The latter fear the inflationary measures of D. Trump's program but the activity indicators published in the United States continue to suggest that the economy is already on very rapid momentum even before he came to power. The Atlanta Fed's GDPNow has also been revised upwards to +3% for Q4, driven mainly by an acceleration in household consumption.
The lull in American sovereign rates has allowed equity markets to regain some color, with notable outperformance of European indices. It was also transmitted to the rest of the bond market, including British rates where again the inflation statistics sent a rather reassuring message, although inflation remains well above the central bank's target. The country's growth trend, however, contrasts with that of the United States, as evidenced by the disappointment in retail sales, which raises fears of a stagflation situation. Investors, however, anticipate that the Bank of England will be forced to act to support activity despite the level of inflation, encouraging them to include a cut in key rates at 91% at the January meeting (vs. 60% in beginning of the week).
-Among the factors that will help keep total inflation higher than central bank targets, oil continued to rise to exceed the threshold of $81/bbl (a high point since last July for Brent). Already supported by the increase in gas prices and the resilience of demand, oil strengthened further following the announcement by J. Biden of a new sanctions plan against Russian oil tankers, the broadest since the start of the conflict in Ukraine, which disrupts supplies to China and India in particular, forced to find more expensive alternatives.
In this context, in the absence of visibility on D. Trump's measures and their impact on rates, we maintain a neutral positioning on the equity markets and a preference for Investment Grade credit on the bond markets.
View this entire article in the PDF below:
