Inflation brings central banks back into the spotlight

The start of the fiscal year was marked by a sharp resurgence of interest rate risk. Rising oil prices, higher sovereign bond yields, and continued robust U.S. economic data have heightened uncertainty about central banks’ policy paths. Oil prices surpassed USD 95, posting their best weekly gain since July. The resumption of hostilities between the United States and Iran and tensions surrounding the Strait of Hormuz have reignited fears about the continuity of oil flows. This rally poses an additional challenge for central banks. Oil prices that remain sustained near USD 100 directly fuel inflationary pressures and complicate the prospects for monetary easing.

United States: Job growth puts monetary easing on hold

The August jobs report was the week’s main macroeconomic event. Job gains totaled 162,000, compared with an expected 55,000, while the unemployment rate remained steady at 4.1%. Revisions to the previous two months’ figures added another 55,000 jobs. This resilience complicates the case for monetary easing and has heightened uncertainty about the Fed’s decision at its September 15–16 meeting.

Other indicators released this week also confirmed resilient U.S. economic activity. The ISM Manufacturing Index came in at 54.6 in August, while the ISM Services Index reached 55.4, with new orders (ISM) at 60.9. The U.S. economy therefore does not, at this stage, exhibit the characteristics of a recession requiring monetary support.

The market, however, reacted favorably to Christopher Waller’s speech on September 3. The Fed governor said he was willing to support keeping rates steady if recent signs of slowing inflation were confirmed, while leaving open the possibility of a rate hike if the situation on the inflation front deteriorated. The bond market remains, nevertheless, the main risk factor. The 10-year Treasury yield has risen back above 4.8%, while the prospect of it crossing the 5% threshold brings to mind the tensions of 2023. The rise in long-term rates no longer reflects only expectations regarding monetary policy; it also incorporates a term premium linked to the size of the deficits and the volume of debt to be absorbed.

Europe: Interest rates and political risk weigh on stocks

In Europe, pressure in the bond markets was the main factor behind the weakness in equities. The yield on the 10-year French OAT reached 4.21%, while sovereign yields rose more broadly across the continent. This pressure comes amid growing concerns about government deficits and the political outlook. In France, the fiscal situation remains a key concern for investors. Equity markets were impacted by this rise in yields, with the luxury sector suffering particularly hard. Conversely, defensive sectors and energy held up better, with the latter benefiting from the rise in oil prices. Overall, the SMI held up better than the major European indices.

The main takeaway from the week is that economic strength is no longer necessarily good news for the markets. In the United States, resilient economic activity and a strong labor market are supporting earnings but limiting the Fed’s room to maneuver. In Europe, rising sovereign yields, fiscal tensions, and political uncertainty are directly weighing on valuations.

This week will be pivotal, with the ECB meeting on September 9–10, followed by the release of U.S. inflation data for August on September 11.