Germany: Approaching a Turning Point?
The elections unfolded predictably. According to preliminary results, the conservatives (CDU/CSU) secured a comfortable victory over the far right. The inability of smaller parties to surpass the 5% threshold paves the way for an alliance between the conservatives and the social democrats. This bipartisan coalition is expected to form relatively swiftly, thereby facilitating the implementation of a program centered on increased investments, particularly in defense, and tax reductions. However, reforming the debt brake would require a two-thirds majority, necessitating the support of either the Greens or The Left, which could complicate the process.
Overall, these elections open up enhanced prospects for Germany, fostering renewed confidence among industrialists and consumers. Had the markets not advanced as robustly this year, the stock market response might have been more pronounced. Nonetheless, in a complex geopolitical environment, ongoing negotiations for a ceasefire in Ukraine and adjustments to customs duties remain significant factors in sustaining the strong performance of European stock exchanges.
A Sabre Strike on US Yields?
In the United States, the inflationary environment has slightly deteriorated. For January, we are indeed witnessing a continuation of the rebound observed in recent months, affecting both consumer and producer prices. Over the past twelve months, headline inflation now stands at 3%, whereas last autumn it appeared to be converging toward the Federal Reserve’s long-term target of 2%. Other indicators likewise confirm the re-emergence of inflationary pressures along the pricing chain, a phenomenon particularly evident in price data from surveys of the New York and Philadelphia manufacturing sectors. This occurs even as the potential impact of a tariff increase by the Trump Administration has yet to materialize.
Nevertheless, the yield on 10-year Treasury bonds has noticeably retreated in recent weeks. While it had dangerously approached the psychological threshold of 5% in mid-January, it has since fallen back to around 4.5% despite the inflationary backdrop. Although some indicators of US economic activity, particularly retail sales, have recently shown signs of slowing, they are not particularly alarming and seem insufficient on their own to justify this easing of yields. Could this recent trend be explained by factors other than growth and inflation expectations? One might consider the impact of the cost-cutting measures proliferating in Washington. Since Donald Trump assumed office at the White House in late January, Elon Musk and his colleagues at the Department of Government Efficiency (DOGE) have been meticulously scrutinizing government expenditures, aggressively slashing costs deemed superfluous, even if it means leaving an army of federal employees in the lurch.
After years of runaway budget deficits and burgeoning federal debt, the prospect of a fiscal turnaround, and consequently, reduced government bond issuance, appears to be pleasing to Treasury investors. Moreover, Donald Trump’s numerous international policy initiatives, including his efforts toward a ceasefire in Ukraine and his proposal to Russia and China for a joint reduction of their nuclear arsenals, hint at a potential decline in defense spending. These developments give reason to hope that the peak of US long-term interest rates may have already been surpassed in this cycle.
This week’s figure: 8
Gold concluded its eighth consecutive week of gains. Despite this progress, investor sentiment remains neutral, and this does not hinder the potential for further increases.
Author
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Daniel Varela holds a degree in business administration with a specialisation in finance from the University of Geneva and began his career in 1989 as a fixed income manager. He joined Banque Piguet & Cie in 1999 as head of institutional asset management and with responsibility for bond analysis and management. In 2011, he became head of the investment strategy and Piguet Galland's investment department. In 2012, he joined Piguet Galland's Executive Committee as CIO.
