Bond yields on the rise

The Consumer Price Index (CPI) released last Wednesday by the US Department of Labor once again highlights the period of high inflation we are currently going through. In the US, prices rose by 7% last year, the largest increase since 1982. Among the components of inflation, the rise in energy prices (+29% in total, +50% for petrol) is in first place. Against the background of a shortage of electronic components, the price of new cars rose by 12% and that of second-hand cars by 37%. Food prices did not soar as much, but still rose by 6.3% in one year. Inflation is less and less being considered transitory as it persists at high levels despite the easing of lockdowns. The global supply chain is still experiencing bottlenecks and the Omicron variant continues to impact production through staff shortages. Joe Biden is in an uncomfortable position: on the one hand he would like not to be seen as the president of rising prices, but on the other hand he continues to propose massive investment plans that are rightly accused of contributing to inflation. With inflation far from its 2% target, the FED wants to ‘act accordingly’ and is therefore now largely hawkish. The situation is better with regards to the labour market. Of course, there are still tensions around the available workforce, pressure on wages and resignations remain at high levels. But the unemployment rate of 3.9% is close to the pre-pandemic level and to full employment. Finally, to conclude on the main economic indicators across the Atlantic, it should be noted that retail sales disappointed in December (-1.9%) after four months of strong growth. Again, Omicron, inflation and logistical difficulties are suspected. The market is now expecting four rate hikes this year, and there is speculation as to whether the first one in March will be 0.25% or 0.50%.

As a result, Treasury yields are rising across the curve: the US 10-year yield at 1.87% is encroaching on the 2% mark. The 2-year and 30-year yields are up 7 basis points to 1.03% (the highest in over two years) and 2.18%, respectively. The greenback has regained its grip on the euro, with the EUR/USD falling back below 1.14 and trading at 1.1335 this morning. In the face of rising yields, equity markets are under pressure (with the NASDAQ 100 falling back to a three-month low yesterday) and volatility is on the rise at the start of the year.

In Europe, inflation has reached 5% on an annual basis but the Governor of the Bank of France continues to forecast that it should fall back below the 2% target by the end of the year. However, he says that this prognosis is not an ‘absolute certainty’. The ECB agrees with this analysis, but says it is vigilant and ready to adjust its monetary policy if necessary. Consequently, unlike in the US, there is no talk of a short-term rate hike in the region for the time being. This has not prevented government bond yields from rising as well. In particular, this morning the German 10-year Bund moved back into positive territory, having gained more than 30 basis points since early December. Also in Germany, the ZEW investor sentiment index rose sharply on hopes that the pandemic will subside by the summer.

In Asia, the Bank of Japan kept its key rate unchanged at -0.10%, a level that dates back to 2016. It also lowered its growth forecast for this year but increased the forecast for the next year (2.8% for 2021/2022 and 3.8% for 2022/2023). Inflation is having very little effect on the country with prices stable this year and forecast to rise by 1% in 2023. This is mainly due to weak domestic consumption and the reluctance of Japanese companies to pass on price increases to the consumer. China published GDP growth of 8.1% for 2021, but with a disappointing fourth quarter (only +4% annualised). Retail sales rose by 1.7% last month, which is the smallest increase since the summer of 2020. Faced with the risk of a slowdown, the central bank lowered its key rate by 10 basis points.

Oil is the fastest growing asset class at the moment. Black gold prices are being driven by Asian demand and geopolitical tensions on the Ukrainian border and in the Middle East. Yemeni Houthi rebels unofficially supported by Iran recently carried out a drone attack on ADNOC oil facilities in Abu Dhabi (UAE). The market is already tight with demand exceeding supply. The risk of having facilities shut down because of attacks is not reassuring and the prospect of an expanding civil war in Yemen does not help the Iranian case.