The strength of American macroeconomic data at the start of the year undermined the overly optimistic scenario of a significant and rapid reduction in key rates by the American central bank. Exit therefore the 6 to 7 rate cuts anticipated at the end of December, including a first reduction in March; Investor expectations are now significantly aligned with the Fed's central scenario, namely 3 to 4 rate cuts while maintaining the status quo until the summer. If some even begin to consider that the American institution could simply not act this year in view of the resilience of the American economy, we can legitimately wonder which of the wind or the weather vane has turned. The economic data published last week tend, in our opinion, to confirm that the wind is still blowing in the same direction, namely that of an American economy in “soft landing” and a process of disinflation still underway.
On the inflation side, the PCE index, favored by FOMC members, was thus published in line with expectations for the month of January, which was rather well taken by the interest rate market and thus tends to show that the recent rise in long-term rates was exacerbated by an overly pessimistic view of inflation dynamics. Although reaccelerating on a monthly basis, the headline and core indices increased, over one year, from 2.6% to 2.4% and from 2.9% to 2.8% respectively and are therefore continuing their normalization. If the detailed reading of monthly variations confirms, as for the CPI indices, a rebound in prices in January driven by services, we do not consider this rebound as a new upward trend. Indeed, economic data published last week across the Atlantic confirm the gradual slowdown of the American economy, which should allow disinflation to continue. We thus note (i) the disappointing publication of the manufacturing ISM for the month of February at 47.8 against 49.5 expected (and 49.1 in January) impacted by the employment and new orders components, (ii) consumer confidence, calculated by University of Michigan, which also marks a decline in the month of February and (iii) the continued decline in demand with the drop in real spending in the wake of disappointing retail sales. These publications are also reflected in the GDPNow (see chart of the week) of the Atlanta Fed, revised down significantly from 3% to 2.1% (at an annualized rate) for the first quarter.
While several statements from FOMC officials have confirmed that the Fed is still counting on rate cuts this year, while asking for patience, the publication of the semi-annual monetary policy report of the American institution confirms the idea of a inflation falling but still too high. This report nevertheless indicates that the easing observed in inflation has reduced the theoretical interest rates resulting from the various Taylor rules close to (but below) the current key rates. While these models naturally have their limits, the Fed should not wait too long before making its first cuts.
