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Financial markets extended gains during a session characterized by low trading volumes, due to the Thanksgiving holiday in the US. The key theme remained expectations for a slowdown in the pace of monetary policy tightening by major central banks, after a dovish reading of the accounts of the last Fed meeting.

A speech by the president of the Federal Reserve, reinforcing the expectation that the central bank will hike rates by 50bp in December, centered the stage in yesterday’s session. In the euro area, headline inflation decreased in November from 10.6% to 10.0% y/y while the core measure remained unchanged at 5.0%.

In the first session of the week, investors digested the US employment report and the HICP inflation data released last Friday together with comments from central bank officials. In particular, San Francisco's Fed President Mary Daly said that a 25bp or 50bp hike in the next meeting are both on the table and pointed to a terminal rate over 5%.

Risk appetite continued to set the tone during the last session of the week, with investors still assessing the resilience in economic indicators and the potential implications for monetary policy decisions ahead. This week, Fed (Wednesday), ECB and BoE (Thursday) will hold their first monetary policy meetings of the year.

In the beginning of the week, investors continued to digest the US employment figures report released on Friday, which suggested that the tightness in the labor market is far from moderating at the pace the Fed would like to see.

Investors started the week with no clear direction, with all eyes focusing on the release of the January CPI inflation print in the US today, where the consensus (according to Bloomberg) expects headline inflation to ease to 6.2% y/y (from 6.5% in December). The second release of Q4 GDP in the eurozone is also published today.

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.

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).

Investors started the week with no clear direction, focused on the US negotiations over the debt ceiling, which were due to start after markets closed. The opposition leader, McCarthy, said his Monday meeting with President Biden set the talks “on the right path” while Biden called the meeting “productive”, but no agreement was reached yet.

As widely expected, the Fed held policy interest rates unchanged at the range of 5.00%-5.25%, although officials signalled that further hikes (of around 50bp by the end of the year) were likely to be needed, following upward revisions in their macro outlook for GDP growth, inflation and the labour market.

The hawkish stance of central banks in advanced economies continued to center the stage in yesterday’s session. On the one hand, the Bank of England surprised with a 50 bp hike (25bp were expected by the consensus) to set the official interest rate at 5%, the highest level since 2008.

The outlook for monetary policy and inflation remained the key themes during a session with mixed results. On the one hand, risk appetite was lifted by a softer-than-expected inflation print in Italy (the headline HICP eased from 8.0% y/y in May to 6.7% in June). On the other, sentiment was spurred by hawkish signals from central bankers in Sintra.

In yesterday's session, weak PMI data for August, which signalled a slowdown in economic growth across the Atlantic, but most acutely in Europe, caused sovereign bond yields to fall across the board (around 13bps. for the long-term references). In the eurozone, PMI data for the services sector fell below the 50 threshold for the first time in 2023.

Investors began the week focused on Wednesday’s FOMC meeting and weighing the impact of the steady rise in crude oil prices, with the Brent benchmark rising a further 0.7% during the session. In this context, European sovereign bond yields rose across the board, as did US short-term benchmarks.

During yesterday’s session investors largely digested the Fed’s hawkish pause on Wednesday, positioning further into the narrative of a soft landing for the US economy and higher interest rates for longer. Thus European and US government bond yields rose in the medium and long term, and either fell or remained unchanged in the short term.

Investor sentiment diverged slightly on both sides of the Atlantic at the start of the week. In the US, the ISM survey showed a manufacturing sector close to recovery while Fed's Bowman gave hawkish signals on future interest rates. This pushed Treasury yields higher while equities fared slightly better, with the Nasdaq up and the S&P500 flat.

In the last session of the week, the awaited release of the September US employment report changed investors’ expectations of the path of interest ahead. Non-farm payrolls increased by a 336k, notably above expectations, and the two previous months were revised by 119k higher. The unemployment rate remained unchanged at 3.8%.

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.

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.