While history doesn't necessarily repeat itself in the same way, it does provide a valuable guide to understanding the current tectonics and their potential implications. For example, the bullish rally underway in the United States since October is rooted in both macroeconomic (monetary policy, inflation) and microeconomic (AI, NVDA et al.) factors. For months now, statistics have been coming in neither too hot nor too cold. A kind of Goldilocks scenario. Unfortunately, previous episodes have shown that such an environment does not last indefinitely, and that the end is not always as expected.

Two possible scenarios

In 2000 and 2007, growth slowed to such an extent that the risk of a hard landing for the US economy increased. As a result, bad news that had previously been interpreted positively in terms of the goldilocks scenario once again became intrinsically bad news, triggering a decline in equity markets. In response to the risk of recession, the Fed embarked on a series of rate cuts to cushion the blow. The key question is whether the current level of interest rates in the US is sufficiently restrictive not to weigh too heavily on growth, while at the same time being sufficiently restrictive to bring inflation back towards 2%. For the time being, the debate is still open, although some players believe that the equilibrium rate is certainly beyond the Fed's expectations. Translation: growth will slow a little, but inflation will remain persistently high, leaving the Federal Reserve unable to lower rates.

Worse still, as the economy expands, inflation will start to accelerate again, as was the case in the 1970s, when multiple rate hike cycles were needed to tame rising prices for good.

Recent statistics do indeed show a decline in inflation and an economic slowdown (GDP below expectations, PMI indices and retail sales down), but so far, nothing significant enough to derail the upward train and the narrative that goes with it. It will certainly take several more months - and additional macroeconomic data - to clear the air and give more credence to one scenario over another.

In the meantime, the US 10-year yield has rallied on the back of support to 4.33%, but will need to break through 4.51% if it is to catch up with its April highs of 4.74%. In parallel, the German bund bounced back well above 2.39% to preserve its bullish structure in progress since December 2023.