US inflation is on a downward trend. It was only 3.2% in October, compared to 3.7% in September. Suppose core inflation (excluding energy and food) is still at 4.0% (against 4.1% in September). Investors' interpretation is evident: the Fed and the United States have done enough to beat their fight against inflation, bringing it back to levels compatible with their objectives.
At the same time, since the US economy is still doing well, a soft landing is now the most likely outcome.
For investors, the conclusion is simple: having done enough to beat inflation, the Fed should no longer raise policy rates and its next move – certainly not imminent – will most likely be bearish.
Unsurprisingly, these figures have had a significant impact on markets.
On the bond front first, the 10-year rate, which had exceeded 5.0% a few weeks ago, is falling back to less than 4.5%.
As for equity markets, they are also celebrating, and the indices representing US SMEs (such as the Russell 2000) make the increase more critical. And because they are less able to use debt markets, these companies are more exposed to bank credit. A cheaper credit would, therefore, be good news for these companies, as well as for the US consumer - who is being squeezed by expensive credit - and the US economy as a whole.
With the interest rate on 10-year treasuries (government bonds) at 4.5% and inflation around 3.2%, US sovereign debt offers attractive real yields.
We, therefore, remain present in this market.
As for the American stock exchange, it will continue to benefit from the country's supremacy over most future areas.
It is always worth watching it, too.
