Rates: Step out of your comfort zone

For some of you, stepping out of your comfort zone may mean going to the gym, taking a dip in the pool, speaking in public or asking your boss for a raise, which in these inflationary times is certainly not a bad thing. As an investor, it could mean shifting your paradigm and looking at things from a new, possibly uncomfortable angle. To paraphrase Sherlock Holmes, "when you've eliminated the impossible, what remains, however improbable, must be the truth...".

For once, last week was punctuated by some major economic releases. Let's start with the Chicago PMI. Expected at 47.30, it came out at 40.40, compared with 48.60 the previous month. It's interesting to note that the PMI is a leading indicator of future recessions in the United States. To see for yourself, let's take a look at the chart below. The PMI is shown in white, while the blue columns correspond to official recession periods as published by the National Bureau of Economic Research (NBER for short). Generally speaking, when the PMI "falls" below 40 (red horizontal line), the USA enters recession at roughly the same time.

(Source: Bloomberg)

The second significant publication concerns job creation. They came in at +339k against 195k expected, a figure also to be compared with April's 294k. To say the least, the U.S. job market is particularly resilient to any hint of recession. At the same time, this is not necessarily good news for the Fed, which is expecting job losses as a result of its restrictive monetary policy. It's a way of weighing on consumption and, by extension, inflation. Except that, for the moment, it's not working very well. Even so, some Fed members have publicly stated that the June meeting should be more of a status quo. In fact, according to CME's Fedwatch tool, the probability of a rate hike has fallen to 29%. In other words, investors see these announcements as signs of a probable pivot, pushing stock market indices upwards in parallel, with technology stocks still in the lead. Funnily enough, it's at this point that dissension is beginning to appear. According to some, the pivot is nothing more than a momentary pause in the ongoing rate hike cycle. Time will tell which of the protagonists was right. In the meantime, the US 10-year yield has returned to test its support at 3.64%, maintaining its positive bias with a potential target maintained at around 4.02%. At the same time, the German 10-year is locked in a narrow trading range of 2.18/2.55%. As a reminder, only a breach of the upper boundary would revive the medium-term upward momentum towards 3.01%. For the moment, the configuration remains mixed, with a negative bias.