Wall Street peaks, but the economy falters

While the week ahead promises to be a busy one, recent events have led to a slight decline in the dollar yield curve, particularly for short and intermediate maturities. After the poor inflation figures published earlier, the price index linked to personal consumption expenditure for January proved to be in line with forecasts. The 0.4% rise in the core index, excluding energy and food, is certainly worrying, but it follows two modest increases of 0.1%. Year-on-year inflation continued to fall, to 2.4% (2.8% excluding energy and food).

As we await the employment report to be published on Friday, the increase in jobless claims observed in February seems to reflect a weakening in the labour market. In the same vein, the latest ISM survey highlights a reduction in the number of employees in the manufacturing sector (employment sub-index at 45.9 in February after 47.1). The ISM PMI, which had been trending upwards until January, fell by 1.3 points in February to 47.8, due to a drop in new orders and production. The deterioration in consumer confidence (106.7 in February after 110.9 in January) and the erosion in real consumer spending, i.e. adjusted for the effects of inflation, are also calling for a reassessment of the dynamism of the USA.

The soft-landing scenario has not yet been invalidated, but recent developments mark a break with the positive surprises seen in the second half of 2023. The Atlanta Fed’s estimate of first-quarter GDP growth dipped to 2.1% after peaking above 4% in early February. This mixed news should not, however, cast doubt on the Federal Reserve’s willingness to wait before adopting a less restrictive monetary stance, in accordance with the interest rate projections unveiled in December. With a fortnight to go before the next FOMC meeting, Jerome Powell is expected to reaffirm his willingness to be patient when he addresses Representatives and Senators in Congress in the coming days.

In Europe, euro yields rose slightly. The 10-year German Bund briefly exceeded 2.5% before falling back to around 2.4%. There is no doubt as to the outcome of Thursday’s meeting of the ECB Governing Council: the status quo appears secure. The statement is likely to adopt a neutral, wait-and-see stance, even though inflation has eased further to 2.6% year-on-year. The persistence of service price inflation and the decline in the unemployment rate to 6.4% in January tend to justify ECB’s “wait-and-see” approach.

In Switzerland, the announcement of the departure of respected SNB Director Thomas Jordan in September had no tangible effect on the franc or on Swiss bond yields. Inflation eased to 1.2% in February, allowing for a change of course in the near future, but the SNB will have to wait until June to avoid too sharp a decline in the franc after the welcome correction (partly orchestrated by Thomas Jordan) since the start of the year.