" So far, so good. But the important thing is not the fall, it's the landing”, the cult line from the film “La Haine” by Mathieu Kassovitz certainly reflects the spirit of many market players. Indeed, if the rebound we have been witnessing since mid-October is based on figures suggesting a lull, we can nevertheless legitimately remain pensive.
As we mentioned in our last meeting on Monday, while the inflation figures in the United States have been rather positive, the fight towards the 2% target is not yet fully won. The members of the FOMC are also there to remind us of this (hoping that they do not have the same foresight as Cassandre), which makes it possible to “recalibrate” the expectations of investors who are sometimes a little too optimistic. Thus, after a historic easing on US government bonds (respectively -33 bps and -35 bps on US 2-year and 10-year bonds over the past week), James Bullard, the president of the Saint-Louis Fed and member the most hawkish of the FOMC, came to add a layer of it in case the message had not been sufficiently heard. Relying on the Taylor rule, which links key rates to inflation and growth, James Bullard considers that a "generous" approach to monetary policy should lead the Fed to raise its rates by at least another point, i.e. around 5%, while a stricter vision would bring rates above 7%... The president of the St. Louis Fed considers that past increases "have only limited effects on inflation" and that key interest rates still remain below a level considered sufficiently restrictive. While the publication of US retail sales for the month of October surprised on the upside, which tends to confirm the scenario of a resilient economy portrayed by James Bullard, the publication, a few days earlier, of producer prices below expectations nevertheless seems to confirm that the phase of falling inflation has indeed begun. After the last Fed meeting and the publication of the latest inflation figures, the central scenario remains, in our opinion, unchanged: the American institution should reduce its pace of rate hikes while nevertheless continuing to raise them to 5% before maintaining them at this level until it deems its fight against inflation on the right track.
Peak inflation is unfortunately not yet in question in Europe since the curve continues to rise inexorably with, however, strong disparities between States depending on their dependence on Russian gas and budgetary support measures. However, the publication this morning of producer prices falling sharply in Germany over the month (first drop since April 2020 and largest monthly drop since the creation of the index) could augur an upcoming turnaround even if they still remain at very high levels.
Finally, the epidemic situation in China seems to be deteriorating with the announcement of three deaths in Beijing, the first official since last May, and more than 24,000 new cases in 24 hours, which has forced the Chinese authorities to reinstate new restrictions. If there is a risk that the relaxations announced by China on November 11 on its “zero-Covid” strategy will not last more than two weeks, China nevertheless seems determined to play the opening and to deal with its ills (real estate crisis and a declared desire to moderate the economic impact of its policy to combat the health crisis).