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The week ended with investors in a risk off mode in the financial markets. In the eurozone, PMI data for France and Germany came in below expectations and below last month's levels, while in the US the index rose slightly from May.

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.

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.

The week began with European investors in a risk-off mood. Eurozone government bond yields rose on fresh hawkish comments from several ECB officials, including Lagarde, who emphasized the idea that the ECB could wait several meetings between cuts

Investor sentiment was mixed on Thursday. In the eurozone, political uncertainty following the upcoming snap elections in France, with Moody’s even issuing a credit rating warning on the country, weighed on equities, with French banks suffering the most.

Investors’ risk appetite increased yesterday after US CPI data for May showed encouraging results in the disinflation process. Government bond yields fell sharply on the news on both sides of the Atlantic, although the gains were somewhat reversed later in the day as the Fed held rates steady and reduced its forecast for rate cuts in 2024 from 3 to 1.

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.

Eurozone investors closed last week by reducing their risk exposure as the chances of a new French parliament willing to increase the country's budget deficit increased. This pushed eurozone government bond yields lower, although spreads widened, particularly on French bonds. Equity indices also fell across the board.

The week started on a mixed note for financial markets. Eurozone government bond yields rose across the board, with peripheral spreads narrowing in stark contrast to French spreads, which widened again. However, equity performance was more mixed across the region, with French indices rising on comments from Le Pen’s party on their respect for institutions.

Tuesday saw a risk-on mood in financial markets. In the US, retail sales data for May barely grew and showed a weaker than expected consumer, supporting hopes for interest rate cuts this year. Fed officials commenting during the day also highlighted good progress on disinflation, pushing Treasury yields lower and equities slightly higher.

A quiet session on Wednesday as US markets were closed for the Juneteenth holiday. In the eurozone, government bond yields rose and peripheral spreads widened after the European Commission opened an excessive deficit procedure for France, Italy, Belgium and five other member states under the 2024 European Semester Spring Package.

Yesterday's session provided some mixed signals on investor sentiment. Government bond yields rose slightly on both sides of the Atlantic, with peripheral eurozone spreads narrowing. This was partly explained yesterday's auction of French sovereign bonds, which despite recent volatility were in high demand from investors.

The week began with eurozone investors digesting the results of the French parliamentary elections, in which Le Pen's RN did slightly worse than polls had predicted. Eurozone peripheral spreads tightened, although government bond yields rose as Lagarde said in Sintra that the ECB was in no hurry to cut rates further.

Market sentiment improved during yesterday’s session as investors turned their attention away from political instability in the euro area to monetary policy in the US. On his second day in Congress, Fed Chairman Powell said the Fed doesn’t need inflation below 2% before cutting interest rates and signaled the balance sheet run-off still has “ways to go”.

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.

Euro area investors kicked off the week on a cautious note as they digested the surprise results of the French legislative elections. The far-right RN came in third place, but the elections resulted in a political deadlock as no party won an absolute majority. 
 

Thursday's session saw light trading volumes as US markets were closed for the 4th of July holiday. Without any major macroeconomic data releases yesterday, investors' focus remained on political sources of instability, as the UK held a general election (which Labour won by a Landslide) and polls suggested Le Pen's RN will not win an absolute majority.

In yesterday's session, euro area sovereign bond yields advanced, with a slight widening of peripheral spreads, while equities retreated amid weak sentiment. Consumer confidence indices in both Germany and France fell from their May readings. Several remarks from ECB officials including Lane and Schnabel reiterated the ECB's data-dependent strategy.

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.