It was not good to be short in November. Almost all asset classes, with the notable exception of raw materials, ended with performances that could be described as spectacular. The cause ? The death of “higher for longer” and the integration by investors of an increasingly rapid reduction in key rates. In just one month, two additional rate cuts, or five in total, are now expected from the Fed in 2024 with a first cut at the FOMC meeting on March 20 or that of May 1, 2024. Consequently, interest rates fell sharply in November (-60 bps for the American 10-year bond!) and bonds naturally benefited from this movement. It’s quite simple, bonds as a whole (Bloomberg Global-Aggregate index) experienced their second best monthly performance of all time and American government bonds their best monthly performance since 1985!
Last week also participated fully in this movement thanks to, on the one hand, the confirmation of the fall in inflation and, on the other hand, a beginning of inflection in the declarations of central bankers. In the euro zone, inflation for the month of November surprised sharply on the downside with a drop in prices of -0.5% over the month (compared to -0.2% expected). On an annual basis, inflation stands at 2.4% while it was still at 4.3% in September. On core inflation, the data is also encouraging since it fell over the month by -0.8% at an annual rate to 3.6%. More than the figures themselves, it is the speed of the decline that is of concern, which, according to François Villeroy de Galhau, is “faster than expected”. As with the Fed, the market now anticipates that the ECB will lower its key rates for the first time in the second quarter of next year. If caution naturally remains required among the members of the European institution so as not to declare victory too quickly, they should also take advantage of the favorable context to accelerate the reduction in the size of the ECB's balance sheet. Thus, initially planned for the end of 2024, PEPP reinvestments could be stopped in advance, as Christine Lagarde declared during her hearing before MEPs. In the United States, the decline in prices is also gaining momentum. Headline and core PCE inflation stood at 3% and 3.5% respectively in November with a clear slowdown in inflation in services excluding rent. But it was the words of Christopher Waller, one of the Fed governors, which really allowed the easing observed on rates. Considered hawkish, he is the first member of the FOMC to mention a future rate cut if inflation continues to fall.
The machine currently seems difficult to stop. The only obstacle, perhaps, before the end of the year: the FOMC meeting on December 13. During the last meeting, Jerome Powell partly justified the Fed's pause by the rise in long-term rates which had a negative impact on financial conditions. They have fallen by more than 70 bps since their high point which could possibly push the Fed president to a more muscular speech.
