At the start of a key week for the central banks, investors traded cautiously as they expect a hawkish shift in tone in monetary policy, in particular from the US Federal Reserve.
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Stock markets were mixed in yesterday's session, with further gains in the U.S. and small declines in the Euro Area. In fixed-income markets, sovereign yields were stable ahead of the central bank policy meetings later this week.
Stock markets posted strong increases in the U.S. while they were mixed in Europe during the last day of the week.
Investors kicked off the week with a somewhat quiet session as they await key inflation data later this week: June CPI for France, Spain and Italy; and the US PCE deflator, the Fed's preferred inflation measure.
Stocks rose across the board as Biden's $1.9tn fiscal package won final approval in the U.S. Congress and CPI data calmed inflation worries. In particular, U.S. CPI inflation rose to 1.7% yoy in February but core inflation nudged down to 1.3% (see our take and why we expect inflation to be under the spotlight in the coming months here).
Investors traded in a positive mood as the OECD signaled a brighter economic outlook. According to its updated forecasts, the world economy is set to grow by 5.6% and 4.0% in 2021 and 2022. The OECD estimates that spillovers from the U.S. fiscal stimulus will add more than 1pp to global growth.
Financial markets ended the week in a risk-off mode despite Friday's inflation data showing that disinflation is progressing on both sides of the Atlantic: US core PCE came in at 2.6% YoY, as expected; and in the eurozone the HCPI prints for Spain, France and Italy were also broadly in line with expectations at 3.5% YoY, 2.5% YoY, and 0.9% YoY, respectively.
Yesterday’s session was driven by the US February CPI report, which showed inflation last month was 3.2% yoy, slightly higher than January’s reading at 3.1%. Despite the slight acceleration, markets still expect the Fed to begin cutting rates this year, betting on a total of 4 cuts, with the first one being on June (with 77% probability).
Optimism about the economic recovery favored a rotation into cyclical equities as investors digested the U.S. Senate's approval of Biden's $1.9tn fiscal package. European stocks rose across the board while tech-related stocks sold off and weighed on the U.S.' Nasdaq and S&P 500 benchmarks.
In yesterday's session, investors traded cautiously as they continued to assess whether central banks will be able to tame inflationary pressures without causing a hard landing. Geopolitical news centered the stage too, after the G7 meeting in Germany and ahead of today's NATO summit in Madrid.
In the last session of the week, investors traded cautiously in absence of key macroeconomic data releases and as they waited for monetary policy meetings this week in the main central banks.
Investors ended the day with positive results, after strong sentiment data in Europe (Germany’s Ifo business climate index rose to the highest level in two years) and labour statistics in the US (new jobless claims fell to 411,000 weekly). In addition, President Biden announced a deal in the Senate on an infrastructure package worth USD 1.2 trillion.
During yesterday's session, investors continued to assess the results of the French elections last weekend which left the country with a fragmented National Assembly. Financial markets seemed to value the situation negatively and adopted a risk-averse tone, sending euro area sovereign bond yields higher and equities sharply lower, particularly in France.
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 sell-off in the US bond market continued on Monday as worries about inflation erode expected bond returns. The yield on 10-year Treasury notes rose 3 basis points to 1.37%. These worries also hit Asian markets, where Japan's 10-year yields rose to 0.13% and Australia's rose to its highest level since June 2019 (1.61%).
Financial markets started the week with all eyes on the ECB’s Governing Council meeting on Thursday. The ECB is expected to leave interest rates unchanged and stick to its "data dependency" approach. European sovereign bond yields fell and peripheral spreads tightened yesterday ahead of the meeting and today's Q2 Bank Lending Survey.
Markets on both sides of the Atlantic saw mixed results yesterday. In the eurozone, where all eyes are on tomorrow’s ECB meeting, sovereign bond yields fell while peripheral spreads remained flat after the ZEW survey showed German business sentiment at its lowest in four months in July and despite the Q2 BLS showing an increase in credit demand.
Markets started the week showing greater risk appetite as the World Health Organization listed AstraZeneca and Oxford University’s COVID-19 vaccine for emergency use. Stocks rose across advanced and emerging economies, the USD weakened moderately and commodity prices edged up. U.S. markets were closed for the Presidents day holiday.
With no known progress on the peace negotiations in the Middle East, yesterday's session was driven by adjacent factors. Energy prices closed mixed as US Vice President JD Vance said neither side of the conflict wanted to take military action. Brent prices fell slightly to settle at USD 111/barrel while TTF prices rallied to close up 3%, at nearly EUR 52/MWh.
Investors started the week with a greater risk appetite than the previous one. Sovereign bond yields were mixed among regions and maturities while, in the money markets, yields fell on both sides of the Atlantic.