When data outweighs central bankers

In line with expectations, the Federal Reserve maintained its policy rate between 5.25% and 5.5% while revising downwards the outlook for monetary easing in 2024. The median forecast of the 19 members of the FOMC now suggests only one reduction in the Fed funds rate to between 5% and 5.25%. The camp of those forecasting an unchanged rate until the end of the year now includes 4 members, while 8 participants are forecasting two rate cuts in 2024.

Although the dot plot always elicits countless comments, it is worth bearing in mind the fragility of these forecasts. The central bankers who play the game of predictions are no fools, and are prone to change their views according to the message conveyed by the sacrosanct data. Ironically, the FOMC’s “capitulation” was overshadowed by the encouraging trend in inflation in May.

The rise in consumer prices, which had been worrying throughout the first quarter and then moderated in April, was modest in May (0.0% over one month and 3.3% year-on-year). Excluding energy and food, consumer prices rose by 0.16% over one month and 3.4% year-on-year. A good monthly figure is unlikely to be enough to restore the confidence of central bankers, but a convincing decline over the summer could prompt the Fed to take a less restrictive course from September onwards.

The decline in producer prices in May (-0.2% monthly, 2.2% year-on-year), the ongoing increase in initial jobless claims and the deterioration in consumer confidence are all symptoms that suggest the Fed should ease monetary policy before the end of the year. On the dollar capital market, the yield on the US 10-year T-Note fell by more than 20 basis points to around 4.25%, well down on the 4.6% level seen at the end of May.

In Europe, the yield on the 10-year German Bund fell below 2.4%. This decline is mainly attributable to developments across the Atlantic. German debt is also proving a safe haven compared with French debt, which was recently downgraded to AA- by Standard & Poor’s. Emmanuel Macron’s risky wager, which could lead to a chaotic parliamentary situation or even a victory for the populist far right, warrants an increased risk premium. The “spread” between the Bund and the 10-year OAT maturity reached 80 basis points, to be compared with a spread of just under 50 basis points before the announcement of the dissolution of the assembly.

Outside the eurozone, sterling and Swiss franc yields also fell sharply in the wake of dollar yields. However, the Bank of England is expected to announce on Thursday that it will maintain its base rate at 5.25%. Despite a slight cooling in the UK labour market, wage inflation is running at close to 6%, fuelling a wage-price loop.

In Switzerland, the status quo is favoured since Thomas Jordan spoke of the inflation risks arising from a possible undervaluation of the equilibrium interest rate. A reduction in the deposit rate would not be unreasonable, however, given the good performance of inflation and the recent rebound of the Swiss franc.