The dollar is soaring with the expected tightening of American trade policy.
Tensions remain high on US long-term rates. The 10-year is trading above 4.40%, i.e. a spread of 210bp against the German Bund. The directions of the new Trump government and the inertia of inflation (CPI, PPI) play a big role in the rise in rates and the strength of the dollar, especially since Jerome Powell now seems less inclined to lower rates quickly. Chinese data are a little better than expected in October, but Shanghai and Hong Kong are falling again. European equities are also sliding, while credit or peripheral sovereigns are better oriented.
American inflation rose to 2.6% in October and producer prices are rising. Furthermore, the revision of unit costs in the second and third quarters (to 2.4% and 1.9%, respectively) has undoubtedly not gone unnoticed by the Fed, which now seems to be wondering about the pace rate cuts against the backdrop of Donald Trump's inflationary agenda. Retail sales barely slowed down in October (+0.4%) after a solid third quarter. In China, household consumption is improving (4.8% over one year), despite the continued weakness of investment, particularly in real estate. In the euro zone, employment grew by 0.2% between July and September, despite unfavorable surveys and the 0.1% drop recorded in France.
Rates, spreads and markets: between decoupling and adjustment
The theme of the decoupling of the American and European interest rate markets is expressed by a spread of the T-note (4.45%) beyond 210bp against the Bund (2.35%). The steepening is common to both markets, but the ECB will have more room to maneuver to relax its rate policy. The potential action of the Central Bank favors the tightening of peripheral sovereign spreads. The OAT, stable around 75bp, however remains away from the movement which pushes the BTP towards the floor of 120bp. At the same time, the euro is adjusting below $1.06, which supports inflation expectations for the November and December HICPs. The steepening of the yield curve in the United States is essentially due to the evolution of the term structure of real rates. The trend is towards flattening inflation. Flows receiving swaps further compress the swap spread. The Bund offers an unprecedented premium of 2bp above the 10-year swap rate. High rate volatility is usually associated with wider swap spreads. The credit market continues to outperform the Bund (-9bp over the past month) and underperform the swap (+8bp). This configuration is extremely rare, but reflects the aversion to budgetary risk, on the one hand, and flows towards the credit asset class, on the other hand. High yield is tightening, particularly in the United States where valuations are very tight historically.
Profits on the S&P 500 were up 6.8% in the third quarter. However, slight profit taking appeared after the reflex rise following the elections. Europe is suffering this turnaround and even more so Asia where Hong Kong lost 6% over the week.
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