Goldilocks extends its holiday in the USA

As US indices set record after record with disconcerting regularity, dollar-denominated bonds overcame a febrile episode triggered by the sweeping victory of Donald Trump and a Republican camp that took control of both houses of parliament. The yield on the 10-year T-Note fell back below 4.2% at the end of a week marked by the publication of several major statistics, such as the employment report published last Friday.

Unsurprisingly, job creation picked up in November to 218,000, after falling to 36,000 in October due to special circumstances (two hurricanes and a strike at Boeing). The household survey shows a slight increase in the unemployment rate, from 4.1% in October to 4.2% in November, an increase of 0.5 percentage points compared to November 2023. Neither too hot nor too cold, the US labour market is proving well balanced, allowing for a normalisation of monetary conditions.

As we await the inflation figures to be published on Wednesday and Thursday, the latest employment report and the statements by Christopher Waller and Jerome Powell are fuelling hopes of a third cut in the key interest rate, in line with the projections unveiled in September. The two central bankers see the continuing strength of the economy as a favourable development that will allow the Fed to be more patient in its quest for ‘neutral’ conditions. In line with this view, the “CME FedWatch” gauge assigns an 86% probability to a 0.25 percentage point cut on 18 December and a more cautious path to 2025, which points to money rates close to 3.75% at the end of next year.

In a conciliatory tone, Jerome Powell hinted that the Federal Reserve would not try to anticipate the changes proposed by Donald Trump during his campaign, but would calibrate its policy according to the fiscal and protectionist measures that would actually be implemented. For his part, the President-elect reaffirmed on Sunday that he would not seek to replace Jerome Powell before the end of his term in May 2026. The alignment of interests between the Federal Reserve and the White House is a welcome development for both bonds and equities.

In contrast to the US, European markets gave up a small part of the gains made in November. The yield on the 10-year German Bund recovered to around 2.1%. The expected fall of the Barnier government in France did not have the dramatic consequences predicted by some scaremongers. The deadlock resulting from a parliament without a stable majority should lead to the creation of a “caretaker” government pending a new dissolution that should take place in 2025.

On Thursday, the ECB Governing Council will hold a meeting which should result in a third consecutive cut in the deposit rate by 0.25% to 3%. The deterioration in the European economy could justify a more aggressive move, but the Council includes a number of ‘hawks’ who maintain a tradition of orthodoxy inherited from the Bundesbank. Whatever happens, the ECB seems set to maintain an accommodating stance. In Switzerland, the SNB is also expected to cut its deposit rate by 0.25% to 0.75% in order to contain the appreciation of the Swiss franc and the resulting deflationary pressures.