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The US Federal Reserve meeting centered the stage in yesterday's session with a 25bp interest rate hike, as expected by the consensus. The description of the economic outlook was very similar to June's, while the president Jerome Powell recognized that the last CPI inflation release surprised them slightly on the positive side.

With little novelties on the data front, investors started the week resuming their positioning to higher rates for longer selling off sovereign bonds, bringing yields up again. The surge was greater on long-term references and widespread across developed economies, with the US 10-year benchmark rising 9 bps. to hit multi-year highs.

As investors await the Jackson Hole conference for some guidance on monetary policy, European sovereign bond yields fell across the board in Tuesday's session. Meanwhile US short-term references posted gains, boosted by Fed's Barkin hawkish remarks on how the current strong economy would allow for higher rates should inflation pick up.

In yesterday's session, weaker-than-expected US economic data led investors to lower their expectations for Federal Reserve interest rate hikes at upcoming meetings.

Sovereign bond yields rose across Europe yesterday after an ECB survey showed consumer expectations for inflation edged up, which could pressure the ECB for further rate hikes. Inflation concerns were also stoked by Brent crude oil reaching a new year high after Saudi Arabia and Russia announced an extension of supply curbs through year's end.

In yesterday's session, investors' attention focused on the ECB monetary policy meeting, where interest rates were hiked by 25bp to 4.0% (depo) and 4.5% (refi). More importantly, the ECB said that these levels, if maintained for a sufficiently long period, might not need to be raised further to return inflation back to 2%.

Financial markets ended the week digesting Thursday’s ECB rate decision. If investors initially interpreted Lagarde’s speech as implying a slightly dovish bias going forward, several ECB officials pushed back against such interpretations on Friday, pushing European sovereign bond yields up, peripheral spreads to widen, and a steepening of the curve.

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.

Yesterday’s session saw global equity markets mostly lower and government bond yields rising as investors continued to digest the “higher for longer” interest rate narrative and some weaker than expected US economic data releases.

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.

Risk-off sentiment took over the market yesterday after the US JOLTS report showed an unexpected rise in job openings in August, which could support further rate hikes by the Fed, although comments from Fed officials on the day were mixed, with Mester leaning towards a hike at the upcoming meeting and Bostic opting to hold.

In yesterday’s session investors traded cautiously as they awaited today’s release of September US employment report, which should give further signs for the future path of interest rates. Weekly US unemployment claims, released yesterday, ticked up modestly as expected and set the stage for today’s data.

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%.

Investors’ concerns over economic growth outlook ahead, and the decrease in the probability of an additional interest rate hike from the US Federal Reserve this year were the main drivers in yesterday’s session.  

Investors’ perception that  central banks will still need to increase interest rates in this hiking cycle was the main driver in yesterday’s session. The release of the last ECB meeting minutes and the somewhat higher-than-expected September CPI inflation data for the US fueled this expectation.

Solid US economic data released yesterday showed a still resilient economy reinforcing the the case for the Federal Reserve to keep interest rates higher for longer. September US industrial production rose to the highest level in nearly five years to 103.6 and retail sales increased 0.7%, up from 0.6% beating expectations.

In yesterday’s session, investors traded with mixed sentiment as they navigate through heightened tensions in the Middle East and a continued rhetoric of “higher for longer interest rates” supported by strong US economic data. President Biden arrived in Israel but has not been able to achieve major diplomatic breakthroughs to calm markets.

In the last session of the week, investors traded with a risk-off mood amid fears of a escalating conflict in the Middle East. The VIX index, despite remaining at historically moderate levels, reached its highest level since March and stock indices declined across the globe.

The week started off with a volatile session as markets await key economic data this week (PMIs for advanced economies and US 3Q GDP), 3Q euro area Bank Lending Survey, the ECB's rate decision, further 3Q earnings, and news from the Middle East.