Markets are readjusting their expectations in the face of inflation and increasing yields.
The decline in bonds intensified in response to US publications which remain solid. Stocks are suffering from rising rates, while the Fed’s 100bp reduction since September appears out of step with economic growth. Bond yields are increasing everywhere, from Treasuries (4.75% on the 10-year) to Bunds (2.6%) via Japan (1.2%), with the notable exception of China. Stocks ended the week on a negative note as money markets revised the Fed’s rate path. The dollar is still gaining ground. Weak equities and rising yields have had a limited impact on sovereign and credit spreads, with spread volatility remaining reduced. In addition to fiscal and political risks, rising yields are also fueled by the rebound in oil and gas prices.
Growth and inflation on target
American economic growth should once again surprise on the upside. Fourth quarter data will be released at the end of January. Consumers continue to spend in anticipation of rate increases, although late payments on credit cards and consumer loans are increasing. Job creation reached 256,000 in December, above consensus. The household survey announces a drop in the unemployment rate to 4.1%. Underemployment is decreasing. With hindsight, the Fed’s 100bp easing since September seems unjustified given the economic situation.
In the euro zone, inflation expectations are rising as the euro plunges towards parity with the dollar.
-Furthermore, inflation indicators and surveys indicate a risk of price slippage. The “prices paid” components of the ISM surveys reflect higher input costs. In addition, households are suffering from the rise in gasoline prices, and their medium-term inflation forecasts reach a 2008 peak of 3.3% according to the University of Michigan survey. In the euro zone, inflation expectations are rising as the euro plunges towards parity with the dollar. Brent, close to $80, due to strengthened US sanctions against Russia, will result in a rebound in energy prices.
The bond market appears to be driven by both higher growth and inflation in the United States. US 10-year yields exceed 4.75% after job release. The Bund is tightening slightly, as growth remains weaker in the euro zone. However, inflation in the euro zone increased in December (2.4%), and weighed on yields. The ability of central banks to cut rates will depend on the impact of US tariff policies on their respective economies. In China, the authorities are easing monetary policy. It is the only market immune to this global trend of rising yields. The primary provided had little impact on sovereign spreads. Strong demand for Italian debt (20-year green BTP) kept spreads almost unchanged. The same goes for credit, where issues are well subscribed. IG spreads in euros remain stable at 90bp against swaps. On high yield, spreads have widened moderately, particularly for CCC ratings.
Strong jobs figures weighed on richly valued U.S. stocks. The Nasdaq lost 1%, and small caps underperformed. Euro zone indices (+2%) benefit from a weak euro. On the other hand, the Chinese markets had a more difficult start to the year.
Related News :