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.
Cerca a CaixaBank Research
Resultats de la cerca
2022 resultats per a Roles of education in the development process
Stock markets edged higher and sovereign bond yields fell modestly in the US and the euro area as investors slightly increased their risk apetite ahead central bank decisions from the ECB and the BOJ, US 4Q GDP and PCE deflator later this week, as well as further earings reports in the US market.
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.
In the last session of the week, investors continued to digest the patient approach for the monetary policy ahead expressed by ECB and US Federal Reserve officials. For example, San Francisco Fed President Mary C. Daly said that the Fed could take its time to do things right, signaling that no further rate hikes are in sight for the moment.
The advance PMI figures for December extended the recent trend of divergent growth between the US and euro area countries. The composite PMI in the US rose from 54.9 last month to 56.6, whereas the euro area composite index stayed below 50, albeit improving from 48.3 to 49.5, boosted by a recovery in the services sector (to 51.4).
Inflationary pressures and monetary policy actions remained the focus on Wednesday, following higher-than-expected HICP data in Germany (headline inflation rose to 9.3% y/y in February after 9.2% in January), ahead of the release of the data for the eurozone aggregate this morning. The ECB also releases the accounts of the last meeting.
On Friday, investors focused their attention on the April employment report for the US, which confirmed that the tight labor market should allow the Fed to continue hiking interest rates. The expectation of a tighter monetary policy led to increases in the yields of sovereign bonds and volatility in stock markets.
Investors' risk appetite rebounded slightly yesterday following Trump's comments late Tuesday on the strength of the US economy. Eurozone government bond yields fell slightly amid the ongoing negotiations to lift the German debt brake. US Treasury yields rose and the curve flattened as trade concerns offset the optimism from the strong February CPI print.
Investors are starting the year cautiously as risk appetite seems to have eased over the holidays. As central bank officials tried to push market expectations of imminent rate cuts, although these expectations remain anchored in March for the Fed and April for the ECB, government bond yields rose across the board, particularly in the euro area.
Generalized risk-off sentiment during yesterday's session following news that President Trump would impose tariffs on the automotive sector by the end of the day, which he finally did (25% on all finished auto imports). Stock markets fell sharply on both sides of the Atlantic, dragged lower by industrial stocks. The dollar strengthened to $1.07 against the euro.
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.
Volatility and risk aversion continued to set the tone across financial markets in the last session of the week. On the one hand, investors sentiment continued to be impaired by liquidity concerns in the banking sector, sparked by the crisis and subsequent closure by regulators of a small tech-focused financial group in the US (SVB).
In the last session of the week, investors traded with a risk-on mood as their economic optimism outweighed concerns of a tighter monetary policy stance by the US Federal Reserve. The release of January employment report in the US showed that its labor market remains tight, with 353k more payrolls and the unemployment rate still at 3.7%.
The hawkish rhetoric from central bank officials was the main driver in yesterday's session, which saw sovereign yields on the rise in the euro area and in the US. In the ECB, Pierre Wunsch said that interest rates might remain at restrictive levels for longer than previously anticipated considering the labor market strength and increasing wages.
The Federal Reserve lowered interest rates by 25 bps to 3.75%–4.00%. Yet Chair Powell struck a hawkish tone, pushing back against market expectations of further cuts. U.S. Treasury yields rose +10bp along the curve, and the dollar strengthened, with the EUR/USD cross near 1.16. The market-implied probability of a December cut fell from 92% to 65%.
Following the resignation of French premier Lecornou, French assets sold off with stocks paring losses and the yield on the 10-year sovereign benchmark rising to push the country's risk premium to 85bp, above Italy's. Contagion to the rest of the euro area was limited, with peripheral risk premia stable and stocks paring mild losses. The EURUSD held at 1.17.
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.
Risk appetite deteriorated on Thursday. Sovereign yields fell in the US after a private report (the Challenger index) showed the US economy shed more jobs than expected in October, reportedly due to AI-driven layoffs. Legal uncertainty around Trump tariffs added pressure, as Supreme Court justices questioned their validity during an ongoing hearing. The move came despite Fed officials speaking on the day pushed back against rate cuts, citing inflation risks and the lack of official data.
Another employment report in the US reaffirming the tightness in the labor market moved financial markets' expectations for the Federal Reserve's first interest rate cut. As of today, a 25bp cut in June has an implied probability of 51%, compared with the 74% of Thursday's close. In the euro area, a June rate cut remains almost fully priced-in.
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%.