Inflation back in the spotlight

The sharp rise in US long-term interest rates naturally brings the issue of inflation and monetary policy tightening, starting with the Fed, to the forefront. The decline in the ISM manufacturing index in December to its lowest level since January 2021 and, above all, the fall in the delivery times and prices paid indices should normally have halted the rise in bond yields by signaling an easing of inflationary pressures. However, the new record number of people who quit their jobs in November (over 4.5 million) has rekindled expectations of an acceleration in wages and thus of a lasting strengthening of core inflation in the US.

The yield on the 10-year US Treasury note is around 1.65% this morning. The dollar is strengthening slightly against the euro (1.13) and the equity markets are easing.

The Minutes of the last Fed meeting will be particularly awaited this evening (8pm CET) as they could give precious indications on the possible timing of the Fed funds rate hike. Before that, the services PMIs in the euro zone and the US could potentially hold some nasty surprises due to the impact of the Omicron wave on short-term activity. Finally, we have the ADP US private employment figures (2.15pm CET) ahead of Friday’s employment report.