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Financial markets started the week with a slight risk-averse tone as investors await inflation data, to be released later this week, that will be key in determining interest rates’ future path. Sovereign bond yields rose across the board, while equity indices edged lower in the US and the euro area.

Yesterday’s session in financial markets was a quiet one without any major macroeconomic data releases and with the Q4 2023 corporate earnings season nearing its end. All eyes remain attentive to today’s release of January’s US PCE deflator, the Fed’s favored inflation gauge, and some euro area countries’ CPI.

US January PCE deflator came in line with expectations (2.4% yoy down from 2.6% the previous month), and euro area countries’ CPI did not surprise either (Germany: 2.5% yoy, France: 2.9% yoy, Spain: 2.8% yoy), boosting markets’ expectations of a first interest rate cut starting in June and July.

Central bank communication preparing the ground to start easing the monetary policy stance soon was the main driver in yesterday’s session. In the euro area, the ECB kept interest rates unchanged and reinforced the data dependency approach, assuring that there is still some more progress to be done in domestic inflation.

In yesterday’ session, investors continued to digest this week’s US CPI report, which showed the “last mile” of bringing inflation back to target is proving to be the hardest. Markets were mixed, with sovereign bond yields advancing modestly on both sides of the Atlantic, while equities posted slight gains in the euro area and small losses in the US.

Markets kicked off the week with a tranquil session ahead of a week full of central bank meetings, starting with the Bank of Japan today, and continuing with the Fed and the BoE later on. In this context, sovereign bond yields slightly rose across the board, while equities advanced modestly in the US led by tech stocks, and were mixed in the euro area.

Investors traded cautiously during yesterday’s session as they digested a mixed bag of economic data releases. Euro area March inflation cooled to 2.4% y/y from 2.6%, slightly below consensus. In the US, the ISM services index surprised to the downside by falling to 51.4, down from 52.6 in February, while the ADP employment report surprised to the upside.

In yesterday's session, new data supported investors' expectations that interest rate cuts could begin this summer, which sent euro area and US sovereign bond yields down. Specifically, weekly unemployment benefit claims rose in the US, and the minutes from the ECB's March meeting confirmed officials are confident inflation is moving in the right direction.

Another employment report in the US reaffirming the tightness in the labor market moved financial markets' expectations for the Federal Reserve's first interest rate cut. As of today, a 25bp cut in June has an implied probability of 51%, compared with the 74% of Thursday's close. In the euro area, a June rate cut remains almost fully priced-in. 

In the first session of week, investors traded with an optimistic tone following the release of better-than-expected economic data in the euro area. In particular, the 2.1% m/m increase in Germany's industrial production in February hinted that one of the laggards in economic growth in the region for the past quarters might have bottomed out.

Markets ended the week on a risk-off tone, with sovereign bond yields falling across the board, equities selling off, and the US dollar strengthening (to $1,06 against the euro), as geopolitical tensions rose in the Middle East and investors sought safe-haven assets. Brent rose above $90/barrel as worries about potential supply disruptions mounted.

In yesterday's session investors adjusted their interest rate expectations amid monetary policy and fiscal news in the euro area, while corporate profits centered the stage in the US.

In the first session of the week, investors weighed somewhat better-then-expected economic data releases in the euro area with dovish comments from central bank officials on both sides of the Atlantic. On the latter, Richmond Fed president Thomas Barkin said that current interest rates are sufficient to bring inflation back to target.

In yesterday’s session investors traded cautiously ahead of tomorrow’s release of US April inflation data, which will be key for the Federal Reserve’s policy decisions. In this context, sovereign bond yields were mostly unchanged on both sides of the Atlantic, while equities were flat in the US and modestly lower in the euro area.

Investors continued digesting this week’s data releases in the US, including the CPI report, retail sales, and new data showing industrial production stalled in April after growing 0.1% in March. In the euro area, remarks from ECB officials including De Guindos, Centeno and De Cos, all pointed to June for an interest rate cut but asserted caution thereafter.

Investors continued to adjust their expectations for future interest rate cuts following strong PMIs, higher-than-expected wage growth in the euro area, and some hawkish remarks from central bank officials. Markets are now pricing in just two cuts from the ECB this year and one cut from the Fed, down from three and two, respectively, last week.

Yesterday’s session saw increased risk appetite in the euro area following dovish comments from the ECB’s Villeroy, who did not rule out two consecutive interest rate cuts in June and July and sees ample space to lower rates from the current 4% policy level. He also remarked that the Fed’s policy should not affect the ECB’s.

The week finished off with a session without any significant movements as inflation figures released on Friday largely aligned with expectations. The US PCE deflator for April came in at 2.7% yoy, as expected. Euro area inflation rose to 2.6% yoy in May, just above the 2.5% expected, although the monthly variation recorded the expected 0.3%.

Sovereign bond yields fell for a second consecutive day on both sides of the Atlantic as softer-than-expected job openings data in the US reinforced expectations the Fed will lower rates this year. In the euro area, markets await the ECB tomorrow, which is widely expected to lower interest rates by 25 bp.

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.