Expected to rise at a monthly rate of 3.3% in its version stripped of food and energy prices, CPI came out at 3.2%. However, this small 0.1 point difference made all the difference, as shown by the movements recorded on equity indices (in white, the S&P 500) and bond yields (in blue, the US 10-year).

Source: Bloomberg

As a reminder, movements in interest rates trigger reactions in equities, and not vice versa. Why is this? If bond yields are significantly higher than equity yields (via dividends), equities have to adjust to become competitive again. In other words, they fall, mechanically increasing yield. This phenomenon has already been commented on extensively for high-dividend stocks (Utilities, Telecom, Real Estate, for example).

Why was CPI important?

The US Federal Reserve changed its stance at the last meeting of the 2024 Committee, adopting a more hawkish stance, even after cutting its key rates by 25 basis points at a time when the US economy is doing well. Investors therefore fear a return of inflation due to what appears to be a mistake by the Fed. Why cut rates when the labor market is still tight and the goal of getting prices back above 2% has not been achieved?

The other question mark concerns the current level of US debt. At a time when the country is booming, and in the absence of open warfare, debt is evolving at the same level as during the Second World War, at around 120% of GDP.

This raises the question of how to (re)finance it, bearing in mind that the first half of the year will see a number of major payments, with hostilities starting in January.

Source : Bloomberg

To finance its debt, the Treasury must therefore sell bonds, which could push up yields and thus weigh on equity markets.

Who holds US debt?

Historically, China and Japan were the United States' main creditors. This is still partly the case, but the Fed is far ahead. And what's more, the Fed is also offloading its bonds to reduce the money supply at the same time as it is cutting rates. Look for the error.

Source : Bloomberg

For further food for thought, I leave it to your sagacity to analyze the following chart. In white, the performance of the S&P 500 since the great financial crisis of 2007-2009. In red, the Fed's balance sheet and successive "Quantitative Easing" and "Quantitative Tightening" programs. Do you notice anything surprising? We welcome your comments.

Source : Bloomberg