A week before the inauguration of Donald Trump, one observation emerges: the Republican inherits a flourishing America, already dominant in many respects. Recent news highlights robust activity defying landing predictions. The ISM index devoted to services, up 2 points to 54.1 in December, shows a significant strengthening of business performance and a resurgence of inflationary pressures: the sub-index devoted to price jumped from 58.2 in November to 64.4 in December. The employment report published last Friday confirms the strength of the United States. The business survey reports an increase in workforce of 256,000 in December (after 212,000 in November and only 43,000 in October due to weather hazards). The decline in the unemployment rate from 4.2% in November to 4.1% in December and the decline in applications for unemployment benefits to around 200,000 also reflect a healthy labor market.
Recent news should therefore confirm the Federal Reserve (Fed) in its decision to interrupt the cycle of interest rate cuts that began in September, in accordance with the signals issued following the meeting of the Monetary Policy Committee (FOMC). ) from December 18. CME futures on the Fed funds interest rate now foreshadow the maintenance of the status quo until next summer and a rate cut limited to 25 basis points in the second half. This trajectory is consistent with the scenario outlined by Governor Christopher Waller who, despite his reputation as a “hawk”, persists in forecasting a decline in inflation in 2025. Alberto Musalem, president of the Saint-Louis Fed, also mentioned the need to act with caution, knowing that the Fed is not yet fulfilling the inflation part of its mandate.
Multiple causes
On the bond market, it’s a grimace for investors who are already amply exposed. Long-term yields reached briefly explored highs in October 2023, near 4.8% for the 10-year T-Note. The causes of this correction are multiple. Some see the beginnings of a new wave of inflation, others the awakening of the “bond vigilantes” who sanction in advance Trump’s budgetary laxity. The Fed is no more immune from suspicion, but the predominant role of the rebound in real yields tends to exonerate the central bank. Despite a slight increase, inflation expectations remain fairly well anchored.
The accentuation of the slope of the “term structure” of interest rates seems essentially attributable to an increase in “term premiums” (or “term premium” in jargon) which should fade away when the fiscal policy developed by the Trump/Bessent duo will be revealed and validated by Congress. In the immediate future, the bond market remains vulnerable and many investors prefer to remain sheltered while waiting to observe 10-year yields which could peak above 5%.
European markets are not immune to turbulence. The yield on the 10-year German Bund crossed 2.6%. Although the euro zone is far from displaying the same dynamism as the United States, the persistence of inflation observed in December (index excluding energy up 0.3% over one month and 2.8% year-on-year ) invites us to reconsider the trajectory of rates controlled by the European Central Bank.
Countries facing a precarious tax situation, such as France or the United Kingdom, are sanctioned. More virtuous, Switzerland is not completely spared: the yield on 10-year Confederation bonds has thus recovered to around 0.5%.
Swiss
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