Markets bend under the weight of inflation

The ECB’s more aggressive tone last Thursday, US consumer confidence at a 40+ year low, US inflation at 8.6%, its highest level since 1981, the Fed meeting this week…markets are bathed in a risk environment and still cannot find a short-term support factor.

This morning the SP500 volatility index, the VIX, jumped 13% to return to May 20 levels. We cannot qualify this movement as panic, but the markets remain completely concerned about the current inflationary environment and the consequences in terms of monetary policies.

The US 10-year rate recovered to 3.25% this morning, its highest level since 2018. But the movements are even more spectacular on short rates: the US 2-year rate climbed to 3.23% at the start of the morning, its highest level since… December 2007!

In Europe, the yield on the Bund (10-year German) stands at 1.57%, its highest level since 2014. But it is above all at the level of interest rate spreads that we should be vigilant in the euro zone: he spread between Germany’s and Italy’s 10-year yields reached 2.40% this morning, its highest level since May 2020, during the first wave of Covid. However, we are still far from the stress levels affected during the debt crisis in the euro zone, where this spread exceeded 5% in 2011 and 2012. But the ECB is well aware that this rate spread can become problematic and has started to mark the ground if necessary, indicating that “instruments” could be used if the fragmentation became more important, without however providing more details.

Sovereign rates are also diverging between France and Germany, the day after the first round of legislative elections, even if it is more accurate to attribute this deviation to the more aggressive tone of the ECB last week. Indeed, while the spread was stable, slightly above 0.5% the days preceding the ECB meeting, it began to widen from Thursday to show this morning at more than 0.6%.

While the markets were already feverish after the ECB meeting last Thursday, the crushing blow came from the United States where consumer confidence, measured by the University of Michigan, fell to its lowest level since the creation of this investigation, that is to say for more than 40 years. Evolving, in fact, below the levels affected during the subprime crisis…we can however legitimately wonder at this stage if we are not evolving in an excess of pessimism, the economic situation and in particular the level of unemployment, being very different levels of the great financial crisis of the late 2000s.

The approach of the Fed meeting this week should not reduce the nervousness on the equity markets. The only good news of the day comes from raw materials, and in particular oil, which are falling back a little. In the short term, this certainly reflects fears for the global economy…but since these fears stem in particular from inflation, itself fueled by the surge in raw materials, any more substantial decline in raw materials would have downward effects on inflation expectations, rates…and therefore would lower the aggressive rhetoric of central banks by a notch.

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