Financial markets are trying to digest the relatively bad news on inflation, and now seem to be focusing on corporate earnings. It has to be said that last week was not marked by the publication of any major statistics, far from it. US retail sales were better than expected. While the news was initially welcomed, investors preferred to see the glass as half-empty, conceding that the resilience of the US economy was de facto feeling the scenario of rates remaining at high levels for longer than expected. As a reminder, at the end of last year, the financial community was counting on six to seven rate cuts by 2024, with the first easing in March. Time has passed, and expectations have been reduced to two rate cuts, the first of which may not take place until the summer or even next autumn.

In this respect, rather than focusing on the sometimes changeable rantings of our dear central bankers, it is often more useful to refer to the movements of the US 2-year to set the equilibrium rate. The chart below explains quite clearly why the market is a far better adviser (visionary, one might say) than any committee.

Source: Bloomberg

For greater visibility, the vertical bars correspond to the point at which rates cross their annual moving average. Over the past 25 years, the yield on the US 2-year has tended to reverse - both upwards and downwards - before Fed funds. At present, it is accumulating on its highs, and we will wait patiently for the 4% break to confirm the market's bearish turn. The Fed should then follow suit in the months ahead.