As we anxiously await the outcome of the US elections, dollar bonds remain under pressure. The yield on the US 10-year T-Note briefly approached 4.4% before falling back to near 4.3% on Monday. Particularly copious, the economic news is eclipsed by the election of November 5. In fact, Donald Trump’s recovery in the polls played a central role in the bond correction that began in October. A “red wave” leading Donald Trump to the White House and the Republicans at the head of both parliamentary chambers is seen as a threat to dollar bonds which now present fairly attractive valuations, out of all proportion to the crippling levels observed in 2021.
The disinterest of investors and traders in recent data can also be explained by the distortions resulting from two hurricanes and the strike which raged at Boeing. The marked drop in job creations, from 223,000 in September to 12,000 in October, therefore did not alarm Wall Street. The stability of the unemployment rate at 4.1% and the decline in unemployment benefit applications to 216,000 according to the latest weekly reading suggest ignoring the slowdown in hiring observed last month. The decline in vacancies and voluntary departures, however, continues to reflect a slow cooling of the labor market.
The drop in the ISM index devoted to the manufacturing sector, from 47.2 in September to 46.5 in October, was also ignored in favor of political news. The marked decline in the sub-index relating to production is probably biased by the strike at Boeing. Estimated at 2.8%, GDP growth in the third quarter turned out to be a little weaker than expected due to the negative contribution of foreign trade. Private consumption, up 3.7%, continues to defy the laws of gravity. Close to 2%, the progression of the price index (or deflator) linked to GDP is in line with the Fed’s objective. However, the behavior of the monthly index relating to consumer expenditure (PCE) was not impeccable in September (0.3% monthly, 2.7% year-on-year, excluding energy and food).
Fed rate cut
Despite this small setback and the strength of activity, the FOMC is preparing to reduce its key interest rate by 0.25% this Thursday, in accordance with a road plan unveiled in September. In the absence of a clear signal in the press release, Wall Street will expect a similar gesture in December. If such monetary outlooks are beneficial for stocks, their implications for bonds are ambiguous, as evidenced by the correction which followed the (overly?) generous cut made in September.
In Europe, euro yields are under severe pressure. Estimated at 0.4% in the third quarter, GDP growth in the euro zone turned out to be a little stronger than expected. The German economy did not contract, while the southern EMU countries benefited from a good summer season. Due to a base effect on energy prices, the acceleration of inflation in the euro zone to 2.0% in October does not call into question the normalization of monetary conditions initiated by the ECB. The rebound in the 5-year Bund yield to around 2.3%, the highest in three months, could constitute an attractive entry point. In the United Kingdom, the Labor government’s first budget saw a sharp increase in yields resulting from an upward revision of public sector financing needs.
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