In yesterday’s session financial markets traded on the diverging outlook between the Federal Reserve and the ECB. Fed officials highlighted that inflation seems to have gotten stuck in the US and so they are in no rush to cut rates, while ECB members all pointed to June as the month they are looking at to lower interest rates.
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Investors started the week trading cautiously as they await for key economic data releases (such as the Q1 GDP figures for the US on Thursday or today’s April flash PMIs) and for the corporate profits of 180 S&P500 companies, which represent about 40% of the index market capitalization (including five of the “Magnificent Seven”).
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.
Another session of mixed results across markets on Wednesday. Sovereign bond yields remained rather flat amid low trading volumes on both sides of the Atlantic. In the eurozone, all eyes were set on today’s ECB meeting, where the bank is expected to leave interest rates unchanged. In the US, Fed officials said they are “closer” to cutting interest rates.
US Q2 GDP surprised to the upside. The economy grew at a seasonally adjusted annualized rate of 2.8%, up from 1.4% in Q1, and the GDP deflator fell from 3.1% to 2.3%. The release supported the narrative that the US economy is achieving a soft landing, and left the probability of 100% that investors assign to a Fed rate cut in September unchanged.
Financial markets experienced a risk-on session on Friday as the US employment report for September came in better than expected, shrugging off geopolitical concerns. The strength of the labour market underlined the dynamism of the economy and eased pressure on the Fed to cut interest rates more aggressively to support the economy.
Investors started off the week on a mixed tone. In the money market, interbank rates rose as investors reassessed their expectations of further aggressive interest rate cuts. Sovereign bond yields also rose on both sides of the Atlantic, with the US treasuries' curve flattening as short-term benchmarks rose the most.
Wednesday saw another mixed session in the financial markets ahead of today's US inflation report. Government bond yields rose slightly in the eurozone and more sharply in the US. The move in the eurozone came as some ECB officials expressed doubts about a rate cut in October, which had so far been favoured by most of the bank's officials who spoke.
Remarks by central bank officials took center stage in yesterday's session. From the ECB, Luis de Guindos reiterated that the ECB is on its path to cut interest rate as inflation data is on track to its 2% target. On the other hand, Fed Chairman Powell said there is no need to rush to lower rates given the strong economic backdrop in the US.
In 2024, the Spanish economy has experienced widespread growth across virtually all of its sectors. The outlook for 2025 also looks promising, although there will be differences in growth rates and the transition to a more sustainable production system will need to be tackled head on. The automotive sector will also face the challenge of remaining competitive in the new global ecosystem.
Investors closed the week driven by the November PMI indices, which showed a growing divergence between the Eurozone and US economies. In the US, the composite index climbed to a 31-month high of 55.3 on hopes of pro-business policies from Trump. In the eurozone, both the services and manufacturing indices fell below 50 and disappointed.
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).
Following the FOMC meeting on Wednesday, during which the Fed signaled a cautious path ahead, euro area financial markets caught up to their US counterparts during yesterday's session. Sovereign bond yields rose by +6bp in the region, and the main equity indices ended sharply lower. Meanwhile, the euro traded around $1.03 against the dollar.
Investors traded without a clear direction during the last session of the week, as they continued to digest a raft of macro data and central bankers' remarks to assess the monetary policy path ahead. Sovereign bond markets were mixed, with yields slightly rising in the US but edging lower in the euro area. Stock markets advanced on both sides of the Atlantic.
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.
As widely expected by markets, the Federal Reserve left the fed funds rate unchanged at 4.25%-4.50% range. The Fed rebalanced its scenario towards higher inflation and lower growth, while the median dot plot again signaled two rate reductions by the end of this year, sending US Treasury yields lower, boosting US equities and strengthening the dollar.
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.
Positive session across markets, fuelled by optimism surrounding the trade agreement reached between the Trump administration and the UK government, which has helped ease tensions and is seen as a potential blueprint for ongoing negotiations with other countries. Additionally, the Bank of England cut interest rates by 25 basis points to 4.25%, citing increased uncertainty in the economic outlook. In contrast, Norges Bank and the Riksbank held rates steady at 4.5% and 2.25%, respectively.
Markets had a choppy session yesterday. News reports that President Trump was considering firing the Fed Chairman sent jitters across markets, pushing Treasury yields higher and the dollar lower. Trump later denied the rumors and Treasuries recovered, while the dollar did not fully erase losses and by the end of the session the euro was close to $1.16.
The announcement of a U.S. - Japan trade deal and hopes of a deal between the EU and the U.S. unleashed investors' risk-on sentiment in yesterday's session. Global stock markets rallied and sovereign yields declined across the board. Safe-haven assets (such as gold and the CHF) retreated while the EUR strengthened towards $1.18.