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Investors continued to trade cautiously yesterday amid messages from central banks signaling the end of the interest rates hiking cycle. Nevertheless, Christine Lagarde said that more evidence is needed to be sure that inflation returns sustainably to the 2% target.

Investors started the week on a downbeat note, with sovereign bond yields falling across the board on both sides of the Atlantic, as expectations grew that major central banks may be done with interest rate hikes. In the Eurozone, however, Lagarde stressed that strong wage growth does not yet allow the ECB to declare victory over inflation.

In Tuesday’s session, investors continued to focus on the narrative that US growth is slowing and that the next move by major central banks will be to cut interest rates at some point next year. This extended the market’s risk-on sentiment of recent weeks, with government bond yields falling across the board and major equity indices rising.

Government bond yields extended their losses across the board on Wednesday as investors continued to focus on future interest rate cuts by major central banks. These expectations were boosted by upwardly revised Q3 US GDP growth figures and better-than-expected November inflation figures in Germany and Spain.

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.

Investors started the week on a subdued note as they await key central bank meetings and data releases this week. Sovereign bond yields were little changed ahead of today's US CPI report. Yesterday, the NY Fed's 1-year inflation expectations index for November extended its decline to 3.4% showing the impact of interest rate hikes.

US November CPI report came mostly in line with expectations: prices grew 0.1% MoM (vs. 0.0% expected) and 3.1% YoY (as expected) down from 3.2% in October, reinforcing the view the Fed will leave rates unchanged at its meeting today. The lack of surprises left markets rather muted, with treasury yields flat and stock indices slightly advancing.

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 the last session of the week, investors focused their attention on the ECB and Fed officials’ speeches, which tried to push back against the expectation for early interest rate cuts.

In yesterday's session, investors traded without major economic references, beyond the Germany IFO which confirmed weakness in business sentiment, and amid continuing comments from central bank officials trying to push back against the expectation of the first interest rate hike (e.g.: ECB's Stournaras and Fed's Mester). 

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.

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.

Financial markets ended the week on a slightly positive note as the earnings season in the US kicked off with the big banks posting solid results. Investors also continued to digest inflation data received during the week which confirmed expectations of a 25bp rate cut instead of a 50bp cut from the Fed. 

Revised inflation figures for Spain and France reaffirmed market expectations of a 25bp interest rate cut at this week's ECB meeting. And, while industrial production for the euro block rose in August and sentiment indicators improved in Germany, the data are unlikely to prevent the central bank from delivering a cut.

Investors traded cautiously ahead of the ECB's Governing Council meeting today, for which markets are expecting a 25 bp interest rate cut. Euro area sovereign bond yields fell for a second straight session and the main equity indices in the region were mixed.

Financial markets had a mixed session as traders weighed incoming macro data and corporate earnings announcements to gauge the state of the economy. The JOLTs report showed that US job vacancies fell in September, while the Conference Board consumer confidence for October surprised to the upside (as did the German Gfk sentiment index for November).

Investor risk appetite remained fairly high as the US election results were digested. The Fed cut rates by 25bps yesterday as expected (as did the BoE) noting an easing labour market and robust economic growth. Investors regarded the rise in US jobless claims last week as due to hurricane disruptions. Treasury yields fell, reversing some of the previous day's moves. 

US inflation data was in line with consensus expectations: headline inflation rose in October to 2.6% yoy from 2.4% in September, while core inflation, which excludes flood and energy, remained at 3.3%. Financial markets continue to price in 25 bp rate cut by the Fed at its upcoming December meeting (with an 85% probability).