Investors welcome US indicators

Macroeconomic trends in the US are reinforcing expectations that the Federal Reserve will soon initiate a phase of monetary easing. Several leading indicators published during the first half of July suggest that activity and inflation are slowing down, opening the door to a key rate cut in September.

The latest employment report confirmed an upward trend in the jobless rate, which rose to 4.1% in June, exceeding the 4% mark for the first time since November 2021. The number of new jobs created amounted to 206,000, close to the average for the first half of the year but not reflecting any overheating. Furthermore, estimates for previous months were revised downwards (-54,000 in May and -57,000 in April).

ISM surveys also paint a picture of a slowing economy. Like the manufacturing index, which is moving slightly below the 50 threshold delimiting expansion and contraction, the gauge for the services sector has also entered this zone, dropping from 53.8 in May to 48.8 in June. While this drop should be put into perspective by the volatile nature of this indicator, the fact remains that the ISM services index has just hit its lowest level in 4 years.

Inflation trends were also satisfactory, with consumer prices rising by less than expected in June. The overall index shows a monthly variation of -0.1% and an annual variation of 3% (respectively +0.1% and 3.3% after excluding food and energy), and remains on the downward trend that began at the end of 2022. Producer price statistics, however, are less favourable, with increases in June of 0.2% month-on-month and 2.6% year-on-year, due in particular to higher margins in the wholesale trade.

On the whole, financial markets welcomed this flow of news pointing to a soft landing for the economy and the increased likelihood of the Fed lowering its key rate by a quarter point for the first time on September 18, and possibly a second time on December 18. Dollar-denominated bonds benefited greatly from this outlook, with the yield on the 10-year T-Note falling below 4.20% at the end of last week. However, the main equity indices also benefited from the valuation’s upgrades induced by the falling yield curve.

After the shock of Donald Trump’s assassination attempt over the weekend, observers are now banking firmly on a Republican presidential election victory followed by a fiscal stimulus program that would deepen deficits. In response, the yield curve steepened again, with a correction in longer-term Treasuries, while the S&P 500 index climbed to new highs.

Eurozone markets followed in the footsteps of their peers across the Atlantic. The ECB is expected to keep its monetary policy unchanged next Thursday, but may clarify its views on the possibility of a rate cut at a later date. France, whose public deficits are in the crosshairs of investors, rating agencies and the European Commission, is still seeking a parliamentary agreement that could support a viable government. Although stabilized in recent weeks, its risk premium could widen again as political developments unfold.