Rates: Top in sight?

Amidst the persistent inflation that continues to grip the United States, the forthcoming election looms with a cloud of uncertainty, further complicated by a labor market that shows signs of faltering. These factors combine to create a cacophony of economic signals that might typically argue against a reduction in interest rates. Despite this, there's a palpable sense of anticipation in the financial markets as the US 10-year Treasury yield teeters on the brink of what could be a pivotal shift.

Last week, US PCE Core inflation came in slightly above expectations at +2.7%, against a forecast of +2.6%. At the same time, personal spending also beat consensus, rising by +0.5% in September versus +0.4% expected. While these elements may weigh on the Fed's rate-cutting pace, job creation has put a piece back into the machine. It has to be said that, with just 12k jobs created, this is a far cry from expectations (100k). These figures should be treated with caution, however, given that two hurricanes occurred during the period under review. Equity indices welcomed the news, finding in it an additional reason for a 25 basis point drop this week.

Interest rates, after an initial easing, have resumed their upward march. The strong recovery underway since September reflects the risk of a return to inflation in the medium term, fueled by a buoyant economy and (overly) accommodative policies. For all that, the US 10-year yield is now just a stone's throw from a major resistance zone. The range to watch, between 4.46% and 4.55%, corresponds to the crossroads between multiple Fibonacci ratios and the line that joins the highs of the past year. The absence of bearish divergence on current levels therefore argues for a continuation of the uptrend towards this zone, which we believe should be exploited to at least attempt bearish reactions, with a return target of 4%.

Source : Bloomberg