Investors traded with a positive tone in yesterday's session as March PMI data surprised on the upside in most regions, particularly in the euro area (Composite Index 52.5 vs 48.8 in February). The advance was more robust in the manufacturing sector, although the services index also increased.
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Concerns about a hotter-than-expected inflation in the US centered the stage in yesterday’s session. In March, headline CPI rose by 3.5% y/y (3.2% in the previous month) and the core index rose by 3.8%, the same rate as in February.
Markets were mixed in yesterday's session. Global stock markets advanced and U.S. sovereign yields nudged down as the U.S. CPI report did not depress investor expectations about Fed cuts. In Europe, the euro strengthened on the back of a hawkish reading of the ECB's meeting, German sovereign yields nudged up but peripheral spreads ticked down.
In yesterday's session, stock volatility declined and investors traded with cautious optimism. Federal Reserve officials reiterated their intention to keep monetary policy unchanged until the economic recovery has been fully completed. Then, the exit of the stimulus would be very gradual and with great transparency.
Markets were mixed in the first session of the week. Stocks advanced in Asia and Europe but retreated in the U.S, where financials weighed on the main benchmarks as investors assessed potential losses from their exposure to Archegos Capital Management, a hedge fund that had failed to meet margin calls.
The hawkish tone set by central bank officials continued to center the stage in financial markets at the start of the week. In particular, ECB chief economist Phillip Lane signaled that further interest rate hikes beyond next week's meeting will be appropriate to ease inflationary pressures.
In a volatile session, investors’ sentiment was clouded by disappointing labour data in the US (new jobless claims unexpectedly rose to 373k during the first week of July) and uncertainty about the evolution of the pandemic. In Europe, the ECB confirmed a decision to modify its inflation target to a symmetric 2%.
Renewed fears about inflation and fiscal discipline prompted a broad sovereign bond sell-off. The Japanese 20-year bond yield reached levels not seen since 1999, the 30-year UK yield touched highs from 1998, and the yields on the 30-year US Treasury came close to 5%. Risk-off sentiment spread to global stock markets which pared losses during the session.
In yesterday’s session, investors had to weigh mixed economic data indicators, as flash PMIs showed how the manufacturing sector in the euro area weakened slightly in March, deep below the 50-points threshold, while the services index managed to increase (52.9 for the euro area).
The upside surprise in the US CPI figure for May led to a sell-off session on Friday as investors reinforced their bets for additional 50bp interest rate hikes from the Federal Reserve beyond the June and July meetings. Headline inflation accelerated to 8.6% y/y while core inflation ticked down to 6.0%.
Markets tilted towards a risk-off mood in a session dominated by U.S. news. U.S., German and other core sovereign yields declined, euro area peripheral spreads widened, safe-haven currencies (such as the CHF and the JPY) appreciated against the USD (while the euro was roughly stable), and stocks exhibited a poor performance globally.
Thursday’s session saw a mixed performance across assets as investors grappled with a mixed bag of economic data and the latest Fed decision. In the US, Treasury yields were lower after the rise in initial jobless claims and the decline in the Producer Price Index raised investors’ expectations of a Fed rate cut in September.
Investors continued to err on the side of caution during the last session of the week, with sentiment impaired by data releases pointing to lingering inflationary pressures and the likely need for further monetary policy tightening.
Investors turned cautious again on Tuesday as the Israel-Iran conflict continued. US Treasury yields fell ahead of the FOMC meeting, where the Fed is expected to leave rates unchanged as it seeks more clarity on the impact of tariffs. Yesterday's data releases showed a softening US economy in May: retail sales dropped by more than expected (although so-called "core" retail sales increased); import prices remained stable, surprising to the upside; and industrial production fell slightly.
Sovereign bond yields fell for a second consecutive day on both sides of the Atlantic as softer-than-expected job openings data in the US reinforced expectations the Fed will lower rates this year. In the euro area, markets await the ECB tomorrow, which is widely expected to lower interest rates by 25 bp.
The week finished off with a session without any significant movements as inflation figures released on Friday largely aligned with expectations. The US PCE deflator for April came in at 2.7% yoy, as expected. Euro area inflation rose to 2.6% yoy in May, just above the 2.5% expected, although the monthly variation recorded the expected 0.3%.
Markets started the week in a mixed mood as investors eye trade negotiations and the central bank meetings in Sintra. Market confidence in Fed rate cuts drove U.S. sovereign yields down, while euro area sovereign yields were little changed. The euro strengthened against the dollar and edged towards $1.18 (a 5-year high).
Investors traded cautiously in yesterday's session and, in the euro area, the major stock indices declined and sovereign yields edged lower. In a panel of central banks in Sintra, Fed's Powell acknowledged that the Fed would have already cut rates this year absent Trump's tariffs, while the ECB's Lagarde stated that inflation is at target in the euro area.
Yesterday’s session saw increased risk appetite in the euro area following dovish comments from the ECB’s Villeroy, who did not rule out two consecutive interest rate cuts in June and July and sees ample space to lower rates from the current 4% policy level. He also remarked that the Fed’s policy should not affect the ECB’s.
Yesterday investors focused their attention on the ECB meeting, which delivered no surprises, and on a report that suggested that Joe Biden's Administration would increase the capital gains rate to finance social spending. In the US, this latter driver increased volatility in stock markets and the main indices declined.