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Investors traded yesterday with most eyes on today’s US CPI report. Oil prices rose again after OPEC released its monthly report and kept its global oil demand forecast for the rest of the year and 2024 unchanged, despite Saudi and Russian cuts. Benchmark Brent ended the session at an annual high, fuelling concerns about inflation.

The Fed delivered a hawkish pause yesterday, leaving interest rates unchanged but acknowledging a strong US economy. The dot-plot projects a tighter policy through 2024 and 2025, consistent with rates higher for longer. US stock indices fell and US Treasury yields rose on the news, with the yield curve flattening, while the USD appreciated.

Euro area and US sovereign bond yields continued to fall during Friday's session as investors continue to expect interest rate cuts by mid-2024. Speaking last Friday, Federal Reserve chair Jerome Powell remarked that policy is "well into restrictive territoy" further fueling the rally in bond markets.

Markets took a pause after last week’s rally which brought the main stock indices to post their best monthly advance in years, and sovereign bond yields their largest monthly cuts in two years. Investors have now turned cautious ahead of this week’s US employment data while still pricing in the likelihood of interest rate cuts as soon as March 2024.

Yesterday’s FOMC meeting boosted investor sentiment as the Fed sent a strong signal that the hiking cycle is over and that its members expect at least two rate cuts in 2024 (according to the median of the Dot-plot projections). This caused government bond yields to fall across the board, especially US Treasuries.

The ECB's caution regarding a pivot in its hiking cycle weighed on investors in yesterday's session. Lagarde's press conference appeared hawkish in contrast to Powell's and the Fed's dot plot on Wednesday, which cooled market expectations for rate cuts in 2024 in both sides of the Atlantic.

In yesterday’s session, investors focused their attention to macroeconomic data releases. In the UK, inflation decreased by more than expected in November, from 4.6% to 3.9% the headline index and from 5.7% to 5.1% the core, reinforcing the idea that the BoE might start cutting rates in the first half of 2024.

Central bank officials continued to push against the expectation of as many as six interest rates cuts in 2024. Yesterday, was Fed’s Christopher Waller turn, who suggested moving not as quickly as in previous easing cycles.

In the first session of the week, investors continued to reassess their expectations on the upcoming easing of the ECB and Fed’s monetary policy stance. The January PMI and ISM data releases showed a stronger-than-expected start of 2024 that decreased further the probabilities of seeing the first rate cut in April and May for both central banks.

In the first session of the week investors traded cautiously as they wait for new messages coming from central bank officials on the interest rate path ahead. In particular, all eyes are on the ECB Governing Council meeting on Thursday, where the ECB is expected to keep rates unchanged and reiterate the data dependency approach for 1H2024.

Investors’ risk appetite increased yesterday after US CPI data for May showed encouraging results in the disinflation process. Government bond yields fell sharply on the news on both sides of the Atlantic, although the gains were somewhat reversed later in the day as the Fed held rates steady and reduced its forecast for rate cuts in 2024 from 3 to 1.

A quiet session on Wednesday as US markets were closed for the Juneteenth holiday. In the eurozone, government bond yields rose and peripheral spreads widened after the European Commission opened an excessive deficit procedure for France, Italy, Belgium and five other member states under the 2024 European Semester Spring Package.

Yesterday’s session centered around the June inflation report from the US: inflation cooled to 3.0% in June (from 3.3% in May) and core inflation fell to 3.3% from 3.4% last month. On a monthly basis, prices fell –0.1%, the first negative rate in four years. Markets are discounting two interest rate cut from the Fed in 2024, and a 40% probability of a third cut.

The Fed held its benchmark short-term interest rate and said it will continue to buy $80 billion in Treasury securities and $40 billion in mortgage-backed securities each month. Policymakers now see the first rate increase coming in 2023 instead of 2024.

The Federal Reserve left interest rates unchanged at 5.25-5.50%, as expected, and hinted that if inflation readings continue in the right direction, a September rate cut "could be on the table." Markets reaffirmed their expectation of three 25bp interest rate cuts for the remainder of 2024. Treasury yields fell by +10bp, and US equities rallied.

The continued repricing of the Federal Reserve's interest rate decision later this week was the main driver of financial markets during yesterday's session. The probability of a 50bp rate cut in the upcoming meeting rose to 70% from 50% last week, and the total amount of cuts in 2024 is now expected to be 120 bp, up from 100 bp.

Risk-off session in financial markets following the largest monthly drop (seven points) in three years in the U.S. Conference Board Consumer Confidence Index, which fell to 98.3 (the lowest level since July 2024), while twelve-month inflation expectations surged by almost 1 percentage point.