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Risk-off sentiment returned to financial markets on Wednesday, as investors reassessed the outlook for the global economy amid the jump in inflation and the rapid withdrawal of monetary policy accommodation. These factors are weighting in the earnings projections of the private sector.

In the last session of the week investors digested the US February jobs report, which gave mixed signs about the conditions of the labor market. In particular, the unemployment rate rose from 3.7% to 3.9%, while 275k new jobs were created, as opposed to the 200k expected. Treasury yields ended mostly flat and US equities fell following a strong rally.

Markets kicked off the week with a tranquil session ahead of a week full of central bank meetings, starting with the Bank of Japan today, and continuing with the Fed and the BoE later on. In this context, sovereign bond yields slightly rose across the board, while equities advanced modestly in the US led by tech stocks, and were mixed in the euro area.

The announcement of a U.S. - Japan trade deal and hopes of a deal between the EU and the U.S. unleashed investors' risk-on sentiment in yesterday's session. Global stock markets rallied and sovereign yields declined across the board. Safe-haven assets (such as gold and the CHF) retreated while the EUR strengthened towards $1.18.

Economic activity data and central bank decisions centered the stage in yesterday’s session. On the one hand, the Bank of England kept interest rates unchanged and hinted that the next move could be a rate cut, as there have been “further encouraging signs that inflation is coming down”. The Swiss National Bank cut rates by 25bp to 1.50%.

In the first session of week, investors traded with an optimistic tone following the release of better-than-expected economic data in the euro area. In particular, the 2.1% m/m increase in Germany's industrial production in February hinted that one of the laggards in economic growth in the region for the past quarters might have bottomed out.

Heightened geopolitical tensions kept markets volatile as the Middle East conflict entered its sixth day. Energy prices moved higher, with Brent crude rising to $85/barrel and TTF gas to €50/MWh. Equities extended their sell-off in the US and the euro area after their short rebound on Wednesday, while the dollar strengthened, pushing EUR/USD toward 1.16.

The Federal Reserve left the fed funds rate unchanged at 3.50–3.75%, while striking a hawkish tone and projecting higher inflation. Chair Powell noted that the economic impact of the Middle East conflict remains uncertain but could add to inflationary pressures and weigh on activity. US Treasury yields rose across the curve, as expectations for a rate cut in 2026 declined toward 50%, while equities ended lower and the dollar strenthened.

Investors digested the Fed's third rate hike of the year (see our detailed analysis of the meeting here) with moderate stock market gains, relatively unchanged sovereign yields, and a mixed behavior in FX markets, where the euro eased to $1.16 while some EM currencies appreciated (such as the Turkish lira the Brazilian real) and others weakened (such as Argentina's peso).
 

In the first session of the week, investors digested the US employment report and the HICP inflation data released last Friday together with comments from central bank officials. In particular, San Francisco's Fed President Mary Daly said that a 25bp or 50bp hike in the next meeting are both on the table and pointed to a terminal rate over 5%.

In yesterday’s session, a mixed release of February’s flash PMIs and a patient tone on inflation from the ECB, according to the last meeting minutes, were the main drivers in financial markets. Sovereign yields edged down in the euro area while increasing in the short end of the US treasury curve. Stock indices managed to advance across the board.

The hawkish stance of central banks in advanced economies continued to center the stage in yesterday’s session. On the one hand, the Bank of England surprised with a 50 bp hike (25bp were expected by the consensus) to set the official interest rate at 5%, the highest level since 2008.

In the last session of the week investors traded cautiously amid doubts over the evolution of the pandemic in the US and as EU leaders ended their Friday meeting with no agreement on the EU recovery plan. 
 

Financial markets started the week with one of their rockiest sessions since the 2008 crisis. The oil price war which had started over the weekend and fears over the economic impact of the coronavirus fuelled a sharp jump in risk aversion, leading to large losses in stock markets, sinking sovereign yields and a big widening in risk premia.

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.

Markets were volatile during yesterday's session, as US stocks reversed the losses of earlier in the day. The S&P 500 gained 0.1% on the day after being down 1.8% at one point earlier on Tuesday. The tech-heavy Nasdaq Composite was down 3.9% in early trading before reversing part of the losses and ending the day down just 0.5%.

In the last session of the week, investors' recession fears increased following the worse-than-expected economic sentiment data. In particular, July's Composite PMIs for the euro area and the US fell below the 50 points threshold, with decreases in both the services and manufacturing indices.

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.