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5%: the finish line for the American 10-year?

Rédigé par Romane Ballin | Oct 31, 2023 1:04:32 PM

The (very temporary) crossing of the symbolic threshold of 5% on the American 10-year rate last Monday left its mark but was ultimately not so surprising given its meteoric rise over the last few weeks (approximately + 35 bps between October 1 and 20!). It was the trend reversal that followed which was astonishing with a fall of around 16 bps between the high point of the session and the closing level. The main cause is the unwinding of short positions on American debt, especially since certain major investors (Bill Ackman and Bill Gross) have openly communicated on the subject. They believe that it is now too risky to remain short on long-maturity bonds given the risks of recession weighing on the economy. If the upward potential now appears more limited, a lasting decline in rates nevertheless remains compromised by economic statistics still in the green in the United States. The American PMI indices have thus not only exceeded expectations in both the manufacturing and services sectors but have also returned to expansion territory above 50. Growth also surprises in the third quarter, at 4.9 % at an annualized sequential rate (compared to +2.1% in Q2), thanks to a substantial increase in household consumption financed by savings (which is also decreasing). The PCE data, the indicator favored by the Fed, came out generally in line with expectations. Total inflation is not slowing down (+3.4% year-on-year as expected) while underlying inflation is flattening over one year (at +3.7% year-on-year as expected vs. +3.8% in August ). In Europe, the story remains very different, as evidenced by the preliminary PMI indices for October. The contraction in activity (composite index at 46.5 compared to 47.1 in September) is observed both in industry and in services, the latter even reaching a low point since February 2021 (at 47.8 ). We will also note the tightening of conditions for granting credit to businesses and households in the 3rd quarter as evidenced by the Bank Lending Survey published last week. After 10 consecutive increases in key rates, the ECB was finally able to pause in the face of numerous signals of the effective transmission of its monetary policy to the economy. This decision, largely expected, was taken unanimously and was accompanied by maintaining the policy of reinvestment of bonds held within the PEPP, a point which reassured many investors. During the press conference, the institution suggested that this pause could last but it ruled out any reduction in key rates in the short or medium term.

In this context, we have once again observed downward trending equity markets, affected by persistent turbulence on rates, concerns about a worsening of the conflict in the Middle East (intensification of bombings in Gaza this weekend ) and company results more mixed than in the previous quarter. Investors, nervous, are also quick to sanction disappointments like the corrections that occurred in the shares of Worldline, Sanofi and, to a lesser extent, Alphabet. Chinese stocks, for their part, benefited from the government's reassuring announcements (increase in the budget deficit from 3 to 3.8% and additional issue of $137 billion in public debt) and the apparent calming of Sino-American relations. However, let us not declare victory too soon and wait for the details of additional spending in order to assess the concrete impact of these measures on the Chinese economy.

This week will once again be busy with figures and speeches and we will carefully follow the meeting of the Fed and that of the BoE which, according to the consensus, should maintain the status quo on their key rates.