As the prospects of monetary easing from the Fed became more and more distant, we finally had some answers last week. So yes, the institution did not reveal any changes to its dot plots (which is normal because it is updated quarterly) but the tone used was in itself quite telling. In addition to the key rates which were kept unchanged for the 6th consecutive month, which was expected, J. Powell took note of the difficulties encountered in eradicating inflation without being alarmed by it. So, if some feared a more hawkish turn, this was not the case, and the president of the Fed even clearly indicated that an increase in key rates is “unlikely” at this stage. For J. Powell, current monetary policy should therefore be sufficiently restrictive to allow inflation to return towards 2%, leaving the door open to one or more rate cuts in 2024. These could also happen more quickly than expected given recent statistics. After last week's first quarter GDP growth, it is the turn of the ISM indices to disappoint and this time activity is contracting in both manufacturing and services. The ISM services index, which came out at 49.4 compared to the expected 52, had not been in contraction territory since 2022! The slowdown in growth is also evident in the labor market, as evidenced by the latest employment figures. According to the ADP and NFP surveys, job creation slowed down in April; the NFP report even strongly surprised on the decline with 175k creations of non-agricultural positions (compared to 240k expected) with a notable slowdown in wages (+3.9% year-on-year compared to +4.1% in March). Investors welcomed this new data and were quick to adjust their expectations to two rate cuts in 2024 with a first in September. The subsequent easing of sovereign rates was also massive, with the American 10-year even losing 16 bps to fall to around 4.5%. However, it is important to remain cautious. Behind this ambient optimism remains the risk of stagflation in the American economy. Although the market paid less attention to them, it should still be noted: the price components of the ISM services and manufacturing indices rebounded significantly in April, unfavorable signals for inflation...
On the ECB side, all the lights are green. Underlying inflation in the euro zone continued to slow down in April (+2.7% compared to +2.9% in March) and, very reassuringly, the prices of services decelerated (+2.7% compared to +2 .9% in March). As a reminder, the ECB had indicated that it was closely monitoring the evolution of wages before acting, but the wage-price loop seems to be running out of steam. Although a first rate cut in June therefore appears to be materializing, the continuation of the monetary easing schedule remains uncertain at this stage. The recent rebound in activity in Europe (GDP up 0.3% in Q1 in the euro zone) calls for a gradual and cautious approach. There are also numerous debates within the institution, with some worrying about the consequences for the exchange rate in the event of a prolonged divergence between key rates on both sides of the Atlantic.
