Financial Markets Daily Report

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On Tuesday, the better-than-expected release of February PMIs fueled an increase in investors’ expectations for the path of official interest rates, which, in turn, pushed sovereign bond yields up in the euro area and in the US.

In a quiet session due to the President's Day holiday in the US, traders continued to weigh incoming economic data (eg consumer confidence in the eurozone rose to -19 from -20.7) with the hawkish tone from central bank officials. In this context, yields on sovereign bonds ticked up in the euro area, nearing year-to-date highs.

In the last session of the week, investors digested the hawkish comments offered by key central bank officials in the US Federal Reserve and ECB. In the former, Michelle Bowmen and Thomas Barkin signaled that interest rates will need to raise further but warned against reading too much into January’s retail sales and employment data.

Volatility and precaution continued to set the tone yesterday, with investors digesting hawkish messages from FOMC officials and hotter-than-expected PPI inflation data in the US (+0.7% m/m in January, the largest gain since June).

Another session with mixed results across financial markets on Wednesday, with investors keeping the focus on solid economic data and the likely implications for monetary policy decisions by major central banks.

Investors continued to err on the side of caution during a volatile session marked by the release of US CPI inflation for January. The report showed headline CPI rose by 0.5% m/m (+0,1% in December), while the year-on-year rate eased only mildly (6.4% after 6.5% in December), above expectations (6.2% according to Bloomberg).

Investors started the week with no clear direction, with all eyes focusing on the release of the January CPI inflation print in the US today, where the consensus (according to Bloomberg) expects headline inflation to ease to 6.2% y/y (from 6.5% in December). The second release of Q4 GDP in the eurozone is also published today.

Risk aversion continued to set the tone during the last session of the week, fueled by a further upward revision in investors’ expectations for the likely path of policy interest rates ahead. These worries were compounded by the announcement from Russia that the country will cut its oil production by 500k barrels a day next month.

In yesterday’s session, investors traded cautiously, closing with mixed results in the US and in Europe. The lower-than-expected HICP inflation print in Germany (9.2% in January from 9.6%) pushed down yields on sovereign bonds in the euro area (despite the hawkish tone from some ECB officials) and allowed stock indices to increase.

Central bank communication remained at the center stage yesterday, as Fed and ECB officials reiterated that monetary policy would need to be restrictive for a while. In the eurozone, GC member Klaas Knot, said the ECB should only decrease the pace of rate hikes once it sees underlying inflation abating, pointing to a 50bp hike in May.

Yesterday investors continued to digest the messages from central bank officials, who, in general, have toughened the stance against inflation and show a more hawkish tone. In this context, yields on sovereign bonds rose further in the eurozone, more notably in the periphery, while remaining broadly unchanged in the US.

In the beginning of the week, investors continued to digest the US employment figures report released on Friday, which suggested that the tightness in the labor market is far from moderating at the pace the Fed would like to see.