Long-term bond yields edge down despite excellent US figures

Yesterday, we estimated that the negative impact of inflation on the purchasing power of US households could weigh on their confidence and reinforce the decline in long-term bond yields. Indeed, the 10-year rate continued its slow slide (1.61% versus 1.64%), but after confidence came out much better than expected! The Conference Board index rebounded to 113.8. While there is a Covid effect, as the health situation is much better than it was this summer, the clear difference with the University of Michigan index suggests that it is the strength of the job market that is boosting consumer confidence.

This means that wage pressures should continue to build and that the probability that the Fed’s monetary tightening will be stronger than anticipated by the markets is increasing. Hence the easing of the 10-year rate, the near stability of the 5-year rate and the rise in the 2-year rate.

The figures published this morning show that inflationary pressures continue to strengthen in Europe: producer prices accelerate to +17.7% year-on-year in Germany and +11.6% in France.

Today, the Chancellor of the Exchequer presents the UK’s 2022 Budget and we are awaiting data on credit in the Eurozone, unemployment in France, durable goods orders and the trade balance in the US. But the markets are waiting for the last two days of the week, which are much busier: ECB, GDP in the US and in the Euro area, inflation in the Euro area.