The most anticipated macroeconomic data of last week, American inflation came out slightly above expectations without this unduly disrupting the financial markets. This virtual absence of reaction, particularly on the rates market, is yet another good example, if one were needed, of the relativism that dominates among many investors. If these figures are not likely to modify the speech of the Fed, which anticipates three rate cuts for this year according to the latest “dot plots”, the expectations of investors, with 6 to 7 rate cuts expected including a first in March, can, on the other hand, seem optimistic, particularly in the case of a soft landing scenario. Also, we think that it is appropriate not to fall into confirmation bias or even into the practice of sophist philosophers capable of defending a thesis and its opposite. Indeed, as specified in our last meeting on Monday, if the pivot of American monetary policy is well established, we remain, at this stage, on the crest line in terms of inflation and growth.
In detail, consumer prices started to rise again in December in the United States with an increase of +0.3% over the month or +3.4% over one year against +3.1% the previous month and +3.2% expected. On the core part, the monthly increase is also +0.3%, which brings the annual variation to +3.9% against +4.0% the previous month and +3.8% expected. If the movement of disinflation is not called into question, the details of the figures confirm that it will be less rapid in the months to come and that the last phase of decline towards 2% will be more gradual. Two main causes explain this deceleration. The first concerns the inflationary pockets which still remain at high levels. This is particularly the case for rents which still represent half of the increase in inflation over December with an increase of +0.5% over the month and +6.2% on an annual basis. Although the decline in this component is well underway, it is, however, much more gradual than initially expected. The second cause lies in the end of favorable base effects on elements which have already declined significantly and which will therefore no longer be sources of rapid disinflation. This is for example the case of energy prices, whose variations will become more volatile after a sharp drop, or of the price of goods. Indeed, on the latter, after a peak of more than 12% at an annualized rate in February 2022, they have now been close to zero for several months now and their contribution to bringing down overall inflation is now quite limited. Thus, in the context of the scenario of an American economy which would always avoid a recession, market expectations on key rate cuts and their timing may appear slightly optimistic even if it should be noted that, during his last speech , the president of the Fed had indicated not to wait for 2% to initiate the first rate cuts. All is relative…
There is also talk of inflation in China, or rather disinflation. The published data shows a new negative variation in prices over one year, although up slightly after the low in November (-0.3% against -0.5%). However, against all expectations, these elements did not push the Chinese central bank to change its key rate. Here too, to try to better understand what is happening in China and the behavior of the PBOC, we would have to escape our Western logic. A reduction in Chinese key rates would have been logical and yet... One thing is certain: the markets continue to shy away from China and we are maintaining our underweighting in the region. Finally, on the geopolitical front, the victory of the pro-independence DDP party in Taiwan's presidential elections does not appear to have exacerbated tensions in the short term. The new president has, in fact, promised to continue trade with China and the loss of his party's legislative majority could be favorable to Beijing. Otherness and the force of relativism in geopolitics are even more complex than in the markets, with Man ultimately remaining the measure of all things...