No shock, no rapid rate cuts

While the S&P 500 index has just set a new all-time high, US Treasuries are under pressure. The US dollar yield curve inched upwards, pushing the yield on the 10-year T-Note into a range of between 4.1% and 4.2%. This rebound was triggered by statements made by Federal Reserve Governor Christopher Waller. His speech suggests that the December projections released by the FOMC are still valid. It is reasonable to expect interest rates to fall in 2024, but the central banker sees “no reason to move as quickly or to cut rates as quickly as in the past” in the current circumstances.

Recent indicators, which are generally solid and trending upwards, support Waller’s view. The sustained rise in retail sales in December (up by 0.6% month-on-month, 5.6% year-on-year) and the improvement in consumer confidence highlighted by the latest University of Michigan survey (78.8 in January after 69.7 in December) are far from justifying any hasty action. In addition, the reduced level of jobless claims (187,000 according to the latest weekly survey) still reflects a buoyant labour market.

The first estimate of GDP growth due on Thursday should corroborate the soft-landing scenario that is fuelling Wall Street’s optimism. In this environment, next week’s FOMC meeting is unlikely to involve any major revelations, and the status quo is likely to continue into March. Futures contracts on the Fed funds rate are now foreshadowing this outcome, with a probability of over 50% and a first cut on 20 May. After this date, the futures contracts point to regular cuts, taking the key rate to 4% by the end of the year. Investors therefore continue to hope for a much faster cycle of monetary easing than the roadmap outlined by the FOMC, which implies a key rate of 4.6% at the end of 2024.

In Europe, central bankers and recent economic developments have also called into question hopes of a rapid fall in interest rates. The yield on the 10-year German Bund has risen to around 2.3%. Christine Lagarde and her colleagues have suggested that we should not expect any action from them before June. So, there is not much to expect from the ECB Governing Council meeting this Thursday. In the UK, the yield on the 10-year Gilt has risen to close to 3.9%. The indicators are sending out a mixed message. Although the rebound in consumer price inflation seen in December argues for maintaining a restrictive stance, the fall in wage inflation and the decline in retail sales could justify a rapid cut in the base interest rate.

In Switzerland, SNB President Thomas Jordan said that the “real” appreciation of the Swiss franc was such that selling currency was no longer a priority for the central bank. In addition, the strengthening of the franc will be considered in the next review of the economic and monetary situation, scheduled for March. Like the ECB, the SNB could start cutting its deposit rate in June.