US macroeconomic data continue to surprise investors. Last week, the US services activity indicator climbed to a new high, once again highlighting the strength of the US economy. The labour market is sending a similarly robust signal, with 160’000 jobs created in August, well above economists’ expectations.
Against this backdrop, a further tightening of monetary policy would appear largely justified, particularly as inflation remains significantly above the Federal Reserve’s target. The release of the Consumer Price Index this week will therefore be closely scrutinised by investors. Any sign of renewed price pressures would strengthen expectations of a rate hike at the Fed’s next meeting on 17 September.
At this stage, however, the market appears undecided, assigning only a 60% probability to a tightening of monetary policy at that meeting. The shift in communication style introduced by Kevin Warsh appears to have unsettled investors and created greater uncertainty. The Fed’s forthcoming meeting will therefore represent another important test for the new Chairman of the Federal Reserve.
The rise in long-term interest rates has continued in recent weeks across most developed markets, with a particularly pronounced increase in Europe. Investors remain concerned about the inflation outlook, as the closure of the Strait of Hormuz continues to fuel upward pressure on energy prices. These concerns are compounded by persistently high sovereign financing needs, alongside a growing volume of corporate bond issuance aimed at funding investment, notably in artificial intelligence.
In Europe, the increase in yields has been especially marked. Germany has not been immune to the trend, but France has attracted the greatest concern. The yield on the 10-year OAT has risen above 4.2%, while its spread over the Bund has widened. This reflects an increase in the fiscal risk premium, at a time when negotiations surrounding the 2027 budget are expected to prove particularly challenging. With both the fiscal deficit and public debt remaining elevated, France has limited room for manoeuvre to reduce its financing needs. Rising interest rates further complicate the equation, as they gradually increase the cost of servicing the debt and constrain the fiscal headroom available.
Switzerland stands out as a notable exception. Long-term yields have remained remarkably stable despite the sharp increase observed elsewhere, underscoring the attractiveness of the Swiss market and the credibility of the country’s
fiscal fundamentals.
Kevin Warsh’s speech at Jackson Hole, which had temporarily reassured markets by restoring confidence in the Federal Reserve’s anti-inflation credentials, therefore appears to have provided only brief respite. Central bank credibility will soon be tested once again, as several major central banks are due to meet and clarify their monetary policy stance by the end of September. Their ability to keep inflation expectations firmly anchored will be a key determinant of the outlook for long-term interest rates.
Nevertheless, we maintain our scenario of a gradual easing in long-term yields. In the United States, we view the 5% threshold on the 10-year Treasury yield as an important technical and psychological support level. Against this backdrop,
periods of market weakness should, in our view, be regarded as opportunities to gradually increase exposure to high-quality bonds, favouring sufficiently long maturities in order to benefit from a future decline in yields.
This week's figure: 0.8%
Inflation in Switzerland accelerated significantly in August, reaching an annual
rate of 0.8%. This figure came in well above the 0.5% estimate, primarily due to a
sharp rise in energy prices affecting petrol, diesel and heating oil. Nevertheless,
consumer price inflation remains considerably more subdued than in neighbouring European countries