The autumn is proving particularly demanding for the leading central bankers of industrialized nations, especially across Europe. Monetary easing is gradually taking hold on the continent, with the exception of Norway's central bank, all major issuers are now shifting towards a phase of monetary loosening. As anticipated, the European Central Bank (ECB) implemented a second 0.25% rate cut last week, following its initial reduction in June. The Swiss National Bank, concerned about the recent strength of the Swiss franc, may follow suit in the coming days. However, investors’ attention will soon pivot to the United States, where the Federal Reserve (Fed) is poised to initiate a rate-cutting cycle after two years of particularly tight monetary policy. Globally, this marks a significant inflection point after several years of rate hikes and persistent inflation. The disinflationary trend observed in recent months has now enabled major central banks with the latitude to reverse course, aiming to support sluggish economic growth.
In financial markets, bonds are among the assets that stand to benefit the most from this shift. Notably, long-term yields began declining even before recent announcements from central banks. For instance, the peak in 10-year yields occurred in October 2023, with US yields approaching 5% and German yields reaching 3%. Switzerland’s long-term rate peak (1.6%) was reached even earlier, in December 2022. Despite periodic moments of uncertainty from bond investors, long-term rates have continued their downward trajectory.
Once again, the bond market's ability to anticipate shifts has been affirmed, raising the question of when to anticipate the next upward phase in long-term rates. This is likely to stem from an improvement in economic prospects in the US, Europe, and globally, a scenario that seems poised for 2025. In the meantime, the potential for further declines in yields, and consequently for additional gains in bond prices, remains intact. Just last week, long-term rates hit new lows, signalling that, for now, the prevailing trend remains one of easing.
The beginning of September mirrored the early weeks of August almost perfectly. Economic activity indicators, coupled with labor market figures, greatly disappointed investors, suggesting a significant deterioration in the US economic outlook. Nevertheless, the recent correction was brief, as recession fears seem to have faded. The anticipated easing of the Fed’s monetary policy largely accounts for the swift rebound of stock indices, now nearing their previous peaks. It would not be surprising to see new records set soon, with sentiment indicators still reflecting a reasonable level of optimism.
Germany's annual inflation rate has fallen below the European Central Bank's medium-term target of 2%. The combination of sluggish growth and moderating inflation is expected to lead to further interest rate cuts in Europe.