It’s high time to wait and see

The past week saw a slight upturn in dollar yields on short and intermediate maturities. Erratically, the yield on the 10-year T-Note fell below 4.5% before rebounding to around 4.65%. This up and down reflects a nervous market, listening for the slightest signal from the Federal Reserve.

In a speech on the theme of inflation, the Fed Chairman dampened hopes of a swift change of course in monetary policy, but did not signal any further interest rate hikes. The central banker was careful not to assert that the battle to drive inflation towards the 2% target was over. The FOMC’s decisions, meeting after meeting, will be based on the full range of incoming data that may influence the outlook for growth and inflation. In short, the only explicit message to emerge from the speech was that the Federal Reserve is in no hurry to cut interest rates, and could raise them further as circumstances dictate.

The fiscal issue came to the fore with the auction of a new 30-year US Treasury bond, which met with weak demand, followed by Moody’s announcement that it was downgrading the outlook for the Uncle Sam’s Aaa rating. In contrast to Fitch and Standard & Poor’s, Moody’s continues to assign its highest rating to US government debt. Moody’s was too cautious to issue more than a mild warning to investors, who certainly didn’t need this announcement to be aware of the deterioration in US public finances.

Among the few indicators published last week, the University of Michigan’s consumer confidence index continued to decline, coming in at 60.4 in November. This fourth consecutive decline from a peak in July heralds a marked slowdown in private consumption in the fourth quarter. This malaise is fuelled by inflation, which households expect to persist, and by a painful rise in interest rates, which is pushing up the cost of consumer credit, leasing and new mortgages.

In Europe, the euro yield curve has remained nearly unchanged. The yield on the 10-year German Bund is still around 2.70%, while money market interest rates peak at close to 4%. Risk premiums on Italy have eased slightly, in line with the narrowing of spreads on corporate bonds and a “risk on” climate that is also apparent in the equity markets.

The meagre economic news from the eurozone confirms the weakness of the economy. Retail sales volumes fell for the third consecutive month in September. The decline in the construction PMI (42.7 in October, the lowest since December 2022) shows that monetary policy tightening is having a deleterious effect on this sector.

Outside the eurozone, sterling interest rates has weakened slightly. The stagnation of British GDP is likely to support the Bank of England’s decision not to raise money-market rates any further. Yields on Swiss franc-denominated government bonds were stable, and even fell slightly on longer maturities. The increase in the number of unemployed, albeit limited, tends to confirm the faltering momentum of the Swiss economy.