The big news and catalyst last week was certainly the meeting of the Federal Reserve's monetary policy committee. The market's call proved right: the Fed indeed cut the cost of money by 25 basis points. What comes next is less obvious. While Jerome Powell clearly suggested the path ahead will depend on data (labor market, inflation, etc.), the analysis of the dot plot shows genuine divergences amongst governors. On this subject, please refer to, Jerome Powell stays the course amid a divided Fed.
Once again, more than the rate cut itself, we focus on how asset classes reacted to understand the current narrative. The Federal Reserve has begun an easing cycle even as the US economy is solid, consumption strong, and financial markets at record highs. Thus, the real neutral rate is likely above the level assumed by the Fed, implying policy could become too accommodative and spark a rebound in inflation as well as a rise in financial assets. A reassuring sign: Treasuries rallied in the wake of the announcement, indicating the bond market is not rebelling and that the cut is not seen as disastrous as in the 1970s.
The reaction to the freshly released November jobs report, delayed by the recent shutdown, seems to confirm the sound footing of the bond market. Now we await the inflation figures for a more complete picture.
Technically, the US 10-year yield briefly confirmed a double-bottom reversal, still valid above 4.08%, while stalling on a symmetry at 4.25%. In other words, breaking below 4.08% would confirm the "good" bond-market reaction to policy, whereas a move through 4.25% would be a negative signal to the financial community. In parallel, EUR/USD pushed above 1.1675/95, lending credence to a further rise toward the September highs at 1.1920, with an interim level at 1.1825.
