Central bankers are in no hurry

Like every year at this period, Americans gave thanks to the joys of shopping and ate many a turkey. As the long weekend kicked off the year-end celebrations, activity on Wall Street slowed to a crawl, with indices making gains for the fourth week in a row! In the absence of any earth-shattering news, US equities seem to be buoyed by seasonal factors and exuberant momentum. Certainly, Nvidia’s quarterly results once again beat analysts’ forecasts and validated investors’ enthusiasm (though without amplifying it).

On the bond markets, we observed « sideways » developments. The yield on the US 10-year T-Note dipped below 4.4% before rebounding to around 4.5%. Minor upward pressure pushed the yield on the 2-year T-Note towards 4.95%. The minutes of the last FOMC meeting revealed nothing new. Jerome Powell and his colleagues believe that the battle to restore price stability is not over. A further tightening of monetary policy has not been completely ruled out, and all participants feel that it is appropriate to maintain a restrictive stance for some time, while waiting for inflation to return to target on a sustainable basis.

A rapid U-turn seems out of the question, and some committee members believe that the reduction in the size of the Fed’s balance sheet should continue after an eventual reduction in the Fed funds rate. This view is not unanimous, however, and it is conceivable that the Federal Reserve could resume its purchases of Treasury bonds under certain circumstances, notably in the event of dysfunction in the Treasury bond market. Put on the back shelf by the return of inflation, the « Fed put » is not totally dead.

Recent economic news has been mixed. The first estimate of PMIs compiled by S&P Global showed a slight deterioration in the manufacturing sector and a timid improvement in services. Unsurprisingly, online retail sales reached new highs on Black Friday. Consumers have not yet capitulated, despite the erosion of confidence and the gradual cooling of the job market.

In Europe, indicators point to a slight improvement in the business climate. In Germany, the IFO index continued the upturn begun in September. The rebound in S&P Global’s PMIs also reflects an upturn in activity across the eurozone (47.1 in November after 46.5 in October). The minutes of the latest meeting of the Board of Governors follow the same tone as those of the FOMC. Recent statements confirm that it is premature to expect any easing, even if a further rise in interest rates is now highly unlikely.

The economic upturn is also apparent in the UK, with the composite PMI rebounding from 48.7 in October to 50.1 in November, and encouraging signs in the retail sector. These developments and the tax relief proposed by Chancellor Hunt in his « Autumn Statement » have caused sterling yields to rise. Finally, credit risk premiums associated with corporate bonds continued to contract, in line with the optimism being expressed on the equity market.