Expected by the financial markets, Jerome Powell's intervention before the Economic Club of New York will have left investors wanting more. For those who were waiting for a little visibility, it's a new time
missed ! The president of the Fed, in fact, limited himself to repeating the contradictory arguments of the “hawkish” and the “dovish”, without giving clear direction. He nevertheless concluded that the US central bank would act cautiously, which in our view implies that it will take a pause at its next monetary policy meeting next week.
On the hawkish side, the elements are known: inflation still remains too high despite the recent decline, particularly that observed this summer, and the resilience of the American economy maintains an upward risk on price developments. The macroeconomic data published last week tend to point in this direction. Retail sales have in fact largely surprised on the rise, as has industrial production. On the dovish side, in addition to the usual arguments on the reduction in tensions, particularly wage tensions, on the job market and on the risk that the currently restrictive monetary policy weighs on growth, Jerome Powell highlighted the rise in geopolitical risk and the recent surge in interest rates. On this last point, it takes up the recent declarations of certain members of the FOMC for whom the recent rise in American long rates (the American 10-year notably broke 5% this morning, a first in 16 years) has a negative impact on financial conditions. and therefore contributes to the work of the Fed. Jerome Powell has, in fact, emphasized that these
“persistent changes in financial conditions may have implications for the pace of monetary policy.” With recent tensions on the US bond market being more due to the widening US deficit than to a real slippage in inflation expectations, one could almost conclude that Joe Biden is doing the Fed's job or that he is shooting himself in the foot…
The rise in long-term rates (and real rates), coupled with the increase in geopolitical risk, led to another bearish week for risky assets. While the third quarter results season will soon be in full swing, there is little doubt that it will lead to a rebound in the stock markets because the microeconomics is currently taking a back seat. If the quarterly results were to show real signs of weakness, this could, however, push certain market players to capitulate.
However, the situation is different on the bond market. Between the rise in rates and the widening of credit margins, the euro market for top-rated bonds offers almost 5% on average compared to just under 9% for high yield, even if strong selectivity is necessary on this last segment. This is a historic opportunity, especially since the upward risk on rates is now quite limited with the end of monetary tightening. A good way to capture it? Our Rendement Sélection 2027 target fund which gives pride of place to Investment Grade bonds.