Goldilocks is alive and kicking

While the equity market has fully recovered from the stress of the first few days of August, US Treasuries have surrendered only part of the gains made over the summer. The yield on the 10-year T-Note has risen above 3.9%, but is still a long way from the 4.2% to 4.4% trading range seen at the start of the summer. Despite the recent correction, US Treasuries returned close to 2% in August. Riskier segments performed well as credit spreads fell back.

The mild tensions seen over the past week are attributable to indicators that suggest that the US economy is continuing to expand robustly, neither too hot nor too cold, in line with Goldilocks’ preferences. Real GDP growth for the second quarter has been revised upwards from 2.8% to 3.0%. The sustained rise in personal spending in July (0.5% in nominal terms and 0.3% in real terms) does not reflect any worrying break, but the fall in the savings rate seen in recent months probably heralds a moderation in household demand.

Price indices attached to personal consumption expenditure, up by 0.2% month-on month and 2.5% year-on-year in July (respectively 0.2% and 2.6% excluding energy and food), show variations compatible with the imminent policy pivot announced by Jerome Powell at the Jackson Hole symposium. However, the extent and pace of the cycle due to begin on September 18th remain uncertain and will depend on future economic and financial developments.

The employment report due on Friday is of particular importance. Figures confirming the weakness highlighted by the report published on August 2 could prompt the Fed to cut its key interest rate by 0.5% on September 18. On the other hand, a fall in the rate of unemployment and a rebound in hiring should prompt the Fed to act with restraint, in line with the scenario currently favoured by a majority of investors. In anticipation of the report, the fact that initial jobless claims have remained stable at around 230,000 for several weeks and the improvement in consumer confidence are grounds for optimism, in line with the consensus forecast of a fall in the jobless rate from 4.3% to 4.2%. The ISM diffusion indices are also likely to have some impact, particularly if they signal a concomitant contraction in manufacturing activity and that of service providers.

In Europe, yields also picked up. This correction wiped out the entire fall that began in early August, for the German Bund, the British Gilts and Swiss government bonds. The marked fall in inflation in the eurozone, from 2.6% in July to 2.2% in August, should not overshadow the persistent pressure on service prices, which rose by 0.4% over one month and by 4.2% year-on-year. Although these figures do not call into question the 0.25% cut in the ECB’s key rates expected next week, they do argue for a dose of restraint in a context of reduced unemployment, which is fostering the development of the ‘price-wage’ loop.