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In yesterday’s session, investors traded cautiously ahead of today’s ECB monetary policy meeting, where we expect official interest rates to remain unchanged (depo and refi at 4.00 and 4.50%, respectively) and a continuation of the data dependency approach.

Central bank communication preparing the ground to start easing the monetary policy stance soon was the main driver in yesterday’s session. In the euro area, the ECB kept interest rates unchanged and reinforced the data dependency approach, assuring that there is still some more progress to be done in domestic inflation.

Macro data releases in the US yesterday gave investors mixed signals about the state of the economy. Higher-than expected producer price index (1.6% yoy vs 1.2% expected) and lower-than-expected retail sales (0.0% vs 0.4% expected) warned about sticky inflation and an economic slowdown, but unemployment benefit requests surprised to downside.

In the last session of the week, yields on sovereign bonds continued to increase, modestly, as investors’ expectations on official interest rates continued to be revised to the upside. In particular the probability of observing the US Federal Reserve cutting rates in June or earlier stands currently at 63% (96% earlier in the month).

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.

In yesterday’s session monetary policy continued to take center stage in financial markets. Investors positioned themselves ahead of today’s US Federal Reserve meeting (where no change in interest rates is expected and the focus will be placed on the dot plot) and weighed comments from ECB officials.

The future path of central bank official interest rates continued to be the main driver in financial markets, as investors reacted to the US Federal reserve meeting and to several ECB members’ speeches.

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 yesterday’s session investors continued to assess the probability that the Fed will deliver 3-4 rate cuts this year given the strength of recent macroeconomic data. In particular, the February PCE deflator grew 2.5% y/y, up from 2.4% last month, and manufacturing activity rebounded sharply in March as the PMI increased to 50.3 from 47.8.

In yesterday's session, new data supported investors' expectations that interest rate cuts could begin this summer, which sent euro area and US sovereign bond yields down. Specifically, weekly unemployment benefit claims rose in the US, and the minutes from the ECB's March meeting confirmed officials are confident inflation is moving in the right direction.

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.

In yesterday’s session investors traded with a cautious mood as they await key US CPI data to be released this afternoon. Bloomberg consensus expects the headline and core indices to increase by 0.3% m/m, leaving the y/y rate at 3.4% and 3.7%, respectively.

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.

The ECB monetary policy meeting yielded, as expected, no change in the official interest rates and a communication consistent with a first rate cut in June, at the next meeting. Christine Lagarde reiterated, though, that the ECB will be data-dependent and added that it will not be Fed-dependent.

Markets ended the week on a risk-off tone, with sovereign bond yields falling across the board, equities selling off, and the US dollar strengthening (to $1,06 against the euro), as geopolitical tensions rose in the Middle East and investors sought safe-haven assets. Brent rose above $90/barrel as worries about potential supply disruptions mounted.

Stronger-than-expected March retail sales in the US casted further doubts on the Federal Reserve’s motives to cut interest rates as soon as this summer. Markets now price a mere 20% probability of a cut in June, and 50% for July.

Generalized risk-off sentiment in yesterday’s session as markets remained attentive to further developments in the Middle East and as expectations of interest rate cuts, especially in the US, are delayed. Sovereign bond yields rose across the board and equities sold off globally, while the US dollar ended slightly higher, and Brent held steady at $90/barrel.

The week ended on a ‘higher for longer’ note, which weighed on assets. US non-farm payrolls for May showed a greater-than-expected job creation and an acceleration in average hourly earnings growth, while euro area compensation per employee also surprised on the upside, sending sovereign yields higher across the board on both sides of the Atlantic.

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.

As expected, the ECB lowered interest rates by 25 bp, taking the depo and refi rates to 3.75% and 4.25%, respectively. As for its next steps, the ECB once again remarked future decisions will be “data-dependent”, noting that the inflation path will not be exempt from surprises.