Last week, we concluded our weekly interest-rate column with the words: "Further easing must be accompanied by a rise in the S&P 500". We've been heard, to say the least! Certainly helped by weaker-than-expected inflation figures. The US Core CPI came in at +4.0% year-on-year, against an estimate of +4.1%, while over the month it was flat. In the wake of this publication, the 2-year yield fell by 18 basis points, while estimates of a status quo at the December 13 meeting have now reached 100%!

Investors still defying the Fed

More interestingly, investors are now betting on a rate cut as early as May 2024, followed by 3 rate cuts up to the end of the year. The narrative remains anchored around a rapid return of inflation below the Fed's targets during the first half of 2024, accompanied by strong corporate earnings. However, this scenario runs counter to that of Fed members, who believe that rates must remain high long enough to keep the evil genie of inflation in its box. Too rapid an easing of monetary policy would result in a rapid resumption of price rises, which would have to be countered with even more drastic measures than at present.

So why does the market think the Fed is bluffing?

Pursuing a restrictive monetary policy not only has consequences for the economy. It also translates into a significant increase in the cost of US debt, and in the Fed's own balance of payments. The market thus believes that the Federal Reserve will not be able to maintain its hawkish stance for long, and that it will soon be caught out by the patrol, especially in the middle of an election year.

In the meantime, the 10-year yield has managed to break its upward momentum in place since last April, with an expected return to 4.10%. Meanwhile, the German Bund is currently testing the bottom of a channel at 2.60%, a break of which would open up the 2.18% level over the next few months. Initial resistance lies around 2.77%, the level of the 34-day moving average, while major resistance lies at 3.01%.


Source: Bloomberg