Markets always have the right to correct their excesses

There was also a correction in the bond market: the US 10-year yield, which had fallen below 3.80% (the lowest level since July), rose last Friday to 4.10%, a recovery of 30 basis points, which largely wiped out the relaxation that appeared after Jerome Powell’s December 13 press conference. Same observation for rates in Europe and especially the German 10-year, which rose to 2.20% on Friday from 1.89% a few days earlier.

We can clearly speak of a healthy market correction, whether it is observed in the stock or bond markets. While financial conditions in the US were already largely relaxed before the Fed meeting (the US 10-year yield had fallen by more than 90 basis points between late October and mid-December), financial conditions were the most flexible since January 2022, according to the National Financial Conditions Index (NFCI), an index compiled by the Chicago Fed, Jerome Powell pleasantly surprised the markets by raising the possibility of discussions on interest rate cuts for the first time.

An area that Christine Lagarde did not dare venture into the following day, during the ECB meeting, even though the economic situation in the eurozone is significantly weaker than in the United States.

This “gift” from Jerome Powell to the markets surprised some observers because it did not appear to be significant at this time of the year, when there was no particular nervousness in the markets, as financial conditions had already relaxed since almost two months and the US macroeconomic figures continued to show good resilience.

Several US employment figures published last week pushed markets to adjust their focus: weekly jobless claims fell to the lowest level since mid-October (202,000), job creation stood at 216,000 against a consensus of 170,000, the unemployment rate remained steady in December at 3 .7%, while consensus expected a small recovery… and the increase in average hourly earnings was larger than expected at 4.1% in annual data, when consensus expected 3.9%.

Also knowing that the Atlanta Fed expects US growth of 2.5% in the fourth quarter, it is quite healthy to see the markets correct what can be described as excessive expectation in December, markets that have evacuated the concept a little too quickly ” higher for longer” from the central banks, this transition phase that precedes the first interest rate cuts.

The recovery in euro area inflation is also a reminder to markets that, while very significant progress has been made in recent months, there is always a “last mile” to go. There will be more rate cuts from the Fed and ECB in 2024, that’s for sure, but a first rate cut in March is not guaranteed at this point.

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