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Another day of rollercoaster swings across financial markets, following the negative surprise in the inflation report in the US and the upside revisions in investors’ expectations of the pace of monetary policy tightening.

On Friday, the survey of the University of Michigan showed an increase in inflation expectations for the US, which led to a rise in sovereign yields and sharp losses on US stock indices. Meanwhile, in Europe, equities managed to register moderate advances. The US dollar strengthened against most currencies and the euro fluctuated below $0.98.

Financial markets started the week with a risk-on session, fueled by the resolution of the political crisis in the UK and hopes that the softening in sentiment data could allow central banks to slow the pace of monetary tightening.

Investors continued to trade with a risk-on mood, fueled by expectations that the Fed and the ECB could decide to reduce the pace of monetary tightening from December, which for the US were reinforced by the release of weak housing data. Investors were also taking position ahead of a crucial monetary policy decision by the ECB today.

In the last session of the week, inflation and GDP releases centered the stage in European trading floors. HICP inflation for October surprised on the upside in most euro area countries as well as Q3 GDP figures for Germany (+0.2 q/q instead of the expected contraction). Today aggregated figures for the euro area will be released.

In yesterday's session, investors traded cautiously amid better-than-expected labor market data in the US. In particular, September job openings and the employment component of the ISM surprised the consensus, increasing the bar for a Fed pivot in the meetings beyond today's (where we expect a 75bp rate hike).

In yesterday's session, investors focused their attention on the Federal Reserve meeting, where interest rates were raised by 75bp to the 3.75%-4.00% target range. Crucially, president Jerome Powell explained that the pace of the upcoming hikes could moderate but that the terminal rate might be higher than previously anticipated. 

Investors continued to trade with a cautious mood on Wednesday, as results from the US midterm elections suggested the Republicans may gain control of the House but the Democrats could hold on the Senate. Investors were also taking position ahead of a crucial CPI inflation report in the US today.

In the first session of the week, monetary policy centered the stage, with important voices from the ECB and the Federal Reserve advocating for a slower pace of interest rate hikes in the coming months.

A wave of weaker-than-expected economic data both in the US and the euro area yielded a moderation in the expected path of policy interest rates which, in turn, pushed sovereign yields downs in both sides of the Atlantic. Stock indices edged up in the euro area and in emerging markets while closing mixed in the US.

The hawkish tone of the ECB at its yesterday's meeting centered the stage in financial markets. The ECB raised official interest rates by 50bp, as expected, but noted that ongoing increases at a "steady pace" will be necessary to bring inflation back to the 2% target and announced that the QT will start in March by not reinvesting €15bn/month.

In yesterday’s session, monetary policy tightening from the main central banks continued to center the stage in financial markets. The Bank of Japan surprised with its decision to increase the range of tolerance around its yield curve control tool. The ten-year sovereign yield rose 25bp towards 0.50% and the JPY appreciated markedly.

Risk aversion returned to the fore during a session characterized by low volumes in the run-up to the holiday season. Investors continued to reassess their expectations about monetary policy tightening amid hawkish commentary from some ECB officials and robust economic data in the US (e.g., new jobless claims and the upward revision in Q3 GDP).

In the last session of the week, investors continued to trade with a risk-on mode, taking on board the fall in HICP inflation in the eurozone (9.2% in December after 10.1%) and the US employment report for December. On balance, the data suggested central banks will continue hiking policy interest rates but likely at a reduced pace.

Risk appetite continued to set the tone in the last session of the week, as investors reassessed prospects for less aggressive monetary policy tightening, on the back of reduced inflationary pressures, and took on board mixed results at the start of the Q4 earnings season among large US banks.

Investors started the week trading with a risk-on mood, taking position ahead of corporate earnings and key economic data to be released this week. Today, the focus will be on the flash PMIs for January, which are expected to edge modestly up in the euro area and in the US, despite remaining below the 50-point expansionary threshold.

In the last session of the week, financial markets were very volatile after the upside surprise in the US labor market report for January. Non-farm payrolls rose by 517k, well above consensus expectations (+188k) and the upwardly revised monthly average in 2022 (401k). The unemployment rate ticked down to 3.4%, a level not seen since 1969.

Yesterday investors continued to digest the messages from central bank officials, who, in general, have toughened the stance against inflation and show a more hawkish tone. In this context, yields on sovereign bonds rose further in the eurozone, more notably in the periphery, while remaining broadly unchanged in the US.

In the last session of the week, investors digested the hawkish comments offered by key central bank officials in the US Federal Reserve and ECB. In the former, Michelle Bowmen and Thomas Barkin signaled that interest rates will need to raise further but warned against reading too much into January’s retail sales and employment data.

Central bank communication continued to center the stage on Wednesday. The release of the minutes of the last Fed meeting showed that almost all FOMC members favored a 25bp rate hike, while just a few would have opted for keeping the 50bp pace. They noted that, despite remaining elevated, inflationary pressures had begun to moderate.