Last week, the amount of Fed rate cuts priced into swap contracts for this year fell to less than 65 basis points, below the Fed’s projections (75 bps).
The March ISM manufacturing report exceeded all economists’ expectations, triggering a bond market sell-off and a rise in Treasury yields of about ten basis points.

U.S. industrial activity unexpectedly rose for the first time since September 2022, thanks to a strong rebound in production and more robust demand, while input costs climbed. Though just above the 50 level that separates expansion from contraction, it ended 16 consecutive months of activity contraction. Firmer order growth illustrates consumer demand resilience and suggests companies have made significant progress in aligning inventory levels with sales.
Meanwhile, the cost of materials and other inputs has risen, indicating persistent inflationary pressures. The price gauge rose 3.3 points to 55.8, the highest since July 2022.

On the other hand, data on personal income and spending for February showed consumption remains strong while progress toward inflation decline has stalled. The unemployment rate remains historically low, below 4%.

Rising yields follow the Treasury market’s first monthly gain since December. After losses in January and February caused by market-implied expectations of an erosion of a Fed rate cut, the market stabilized in March after policymakers maintained their projection that three quarter-point cuts are likely this year.

At the beginning of the year, the easing expected for 2024 exceeded 150 basis points. This expectation was based on the idea that the U.S. economy would significantly slow due to the Fed’s 11 rate hikes over the past two years. Since then, growth data has vastly exceeded expectations, while the downward trend in inflation has slowed.

Federal Reserve Chairman Jerome Powell reiterated that the U.S. central bank was in no hurry to cut interest rates as policymakers await further evidence that inflation is contained.
The core personal consumption expenditures price index, which excludes volatile food and energy costs, rose 0.3% in February after climbing 0.5% the previous month, marking its most robust increase in a year. The measure is up 2.8% from a year earlier, still above the Fed’s 2% target.

In the meantime, the situation is entirely different in the Eurozone. While growth remains sluggish, inflation continues to show signs of decline. In France, inflation has fallen below 3% for the first time in 2 and a half years. Italy reported a result below expectations, confirming a trend pushing the European Central Bank towards a rate cut.

Prices in France, the second-largest economy in the Eurozone, increased by 2.4% year-on-year in March after rising by 3.2% the previous month. In Italy, the third-largest economy in the bloc, inflation had already fallen below 2% in October. Data released on Friday showed an acceleration of 1.3% from 0.8% in February, which is less than the expected 1.5%.

As inflation approaches the European Central Bank’s target of 2%, we are nearing a first interest rate cut in June. Economists and markets share this expectation, with investors almost entirely betting on a reduction in the deposit rate from 4% to 3.75% at the institution’s meeting on June 6.

Consequently, the spread between interest rates will increase, pushing high pressure on the euro and strengthening the dollar.