It’s almost a sigh of relief! Launched into an inexorable decline towards 4%, American 10-year rates, which were still close to 5% at the end of October, took advantage of the November American employment report to regain a little stability. If the decline in itself was not a bad thing (especially for the bond managers that we are), we had gone, in a few days, from one extreme to the other and this publication has the merit of bringing back a little calm on the interest rate market. At the same time, and this is notable enough to be underlined, the “good news” remained “good news”. The stock markets reacted well to this publication, with investors considering this report as confirmation of the soft landing of the American economy rather than a challenge to the Fed's rate cuts for 2024.
In detail, job creations came out slightly above expectations (199k against 185k) and increased compared to the previous month (150k). This movement is explained by the reintegration of strikers into the automobile sector, although they had penalized the previous report. Adjusted for these movements, job creation shows a deceleration over the last 2 months. If this confirms the decline in tensions in the labor market, these data also confirm the resilience of the American economy with companies which, as a whole, are still not laying off workers. It should be noted in particular that the services sector remains dynamic with job creation still sustained in the catering sector. Furthermore, salaries continue to increase at a faster rate than expected (+0.4% over the month compared to +0.3% expected and +0.2% the previous month) which brings the annual increase to 4%. This is therefore good news for the American economy as inflation continues to slow. Indeed, the real wage of households is increasing and will therefore maintain consumption, the pillar of growth. Finally, the publication highlights a drop in the unemployment rate from -0.2% to 3.7% while the participation rate continues to improve. This report on employment therefore constitutes the best of both worlds (see our meeting on Monday, November 20, 2023) of an economy with less tension but without collapse.
This publication is also good news for Jerome Powell who must have started to take a dim view of the somewhat too rapid drop in long-term rates and the resulting easing of financial conditions. If the Fed's pause is now no longer in doubt, the president of the American institution should rely on the resilience of the labor market to try to recalibrate a little investors' expectations in terms of lowering key rates. Investors have, in fact, quite violently turned around in a few weeks, going from a forecast of 2 key rate cuts in 2024 in mid-October to 6 before last Friday's employment report (5 after this publication). ; see chart of the week). We therefore consider that Jerome Powell could be slightly hawkish for the last Fed meeting of the year before blowing the whistle on the end of the year. This end of the year has given new relief to the hearts of investors and if, to paraphrase the philosopher René Guénon, some like to believe in an exit from the iron age for an entry into the golden age, this does not could, at the very least, be a generalized hope as the factors of political, geopolitical, climatic disorder, etc. are exacerbated. On the financial markets, the return to “a normal cycle” in terms of monetary policy certainly leaves some grounds for hope, even belief, but we will be careful not to indulge in any irrational euphoria.
