The heaviness of the bond market was largely confirmed in the light of stronger-than-expected retail sales figures for industrial activity in the United States.
The rise in yields did not spare Euro-denominated Treasuries, despite much more mediocre figures, the reason being that the ECB will act, come what may, after the FED.

However, the scenario of a rapid rate cut by the FED (at the end of March) is receding: the consensus, which was over 77% before the weekend, was down to 63% according to the FedWatch barometer on Tuesday evening.
It should fall below 50 with the series of "stats" published at 2.30 p.m.

The yield on T-Bonds clearly sets the tone: the 10-year has risen by +3.4pts to 4.1010 (it's been worse, reaching 4.13%), the 2-year by +14pts to 4.3600% (it's getting worse as the hours go by this Wednesday)... bringing it back to its December 21-28 levels.

US retail sales continued to grow solidly in December: the Commerce Department reported a 0.6% increase last month, whereas economists were only expecting a 0.4% rise.

And year-on-year, the increase at the end of December was 5.6%, well above the 5.1% estimated.

In detail, retail sales were buoyed by purchases of automobiles (+1.1%), clothing and accessories (+1.5%), but also by those made in department stores (+3%) over the Christmas period.

Excluding automobiles and fuels, retail sales rose by a further 0.7%, as in November.

Industrial production also came as a surprise: in total contradiction with the New York Fed's Empire State index published on Tuesday (which showed a sharp decline, and was even at its lowest level since May 2020), the Federal Reserve reported an unexpected +0.1% increase, thanks to the resilience of consumer goods manufacturing.

In detail, production of consumer goods rose by 0.2%, while that of raw materials increased by 0.1%.

Production in the mining sector rose by 0.9%, while that of utilities fell by 1%.

The industrial capacity utilization rate stood at 78.6%, unchanged month-on-month.

In Europe, yields are tightening without much connection with the "figures of the day": our OATs are down +7.2pts to 2.8130%, Bunds +6.5pts to 2.280% and further south, it's even worse with +8pts on "Bonos" and Italian BTPs close the market with +10pts to 3.9110%.

But where the going gets really tough is on 'Gilts', whose yield explodes by +22Pts to 4.022%, as investors flee on discovering UK consumer prices (ONS figures) rebounding to +4% (this would be the result of some 'adjustments' to calculations on various inflation components... unless this restores the end-2023 figures to reality).

Annual inflation in the eurozone was also on the menu, and no nasty surprises: it stood at 2.9% in December 2023 according to Eurostat, compared with 2.4% in November (1 year earlier, it was 9.2%), the 0.5% rebound expected with 'base effects' becoming less favorable.

Despite reassuring inflation figures and much less glowing business activity than in the US, the probability of a rate cut in March is now estimated at just 29%, compared with 43% before the weekend: the ECB won't beat the FED to the punch, so we'll have to be more patient.

"It was inevitable. The gap between market expectations regarding the extent of rate cuts in 2024 and the rhetoric of central bankers was growing day by day", explains Christopher Dembik, Investment Strategy Advisor at Pictet AM.

On the Old Continent, Christine Lagarde, President of the European Central Bank (ECB), spoke this Wednesday at the Davos economic forum... with no impact on our OAT/Bunds at the end of the day.


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