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.
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Following the resignation of French premier Lecornou, French assets sold off with stocks paring losses and the yield on the 10-year sovereign benchmark rising to push the country's risk premium to 85bp, above Italy's. Contagion to the rest of the euro area was limited, with peripheral risk premia stable and stocks paring mild losses. The EURUSD held at 1.17.
In the first session of the week investors traded cautiously as they wait for new messages coming from central bank officials on the interest rate path ahead. In particular, all eyes are on the ECB Governing Council meeting on Thursday, where the ECB is expected to keep rates unchanged and reiterate the data dependency approach for 1H2024.
Risk-off sentiment returned to financial markets on Wednesday, as investors reassessed the outlook for the global economy amid the jump in inflation and the rapid withdrawal of monetary policy accommodation. These factors are weighting in the earnings projections of the private sector.
Economic activity data and central bank decisions centered the stage in yesterday’s session. On the one hand, the Bank of England kept interest rates unchanged and hinted that the next move could be a rate cut, as there have been “further encouraging signs that inflation is coming down”. The Swiss National Bank cut rates by 25bp to 1.50%.
The Federal Reserve lowered interest rates by 25 bps to 3.75%–4.00%. Yet Chair Powell struck a hawkish tone, pushing back against market expectations of further cuts. U.S. Treasury yields rose +10bp along the curve, and the dollar strengthened, with the EUR/USD cross near 1.16. The market-implied probability of a December cut fell from 92% to 65%.
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 Federal Reserve left the fed funds rate unchanged at 3.50–3.75%, while striking a hawkish tone and projecting higher inflation. Chair Powell noted that the economic impact of the Middle East conflict remains uncertain but could add to inflationary pressures and weigh on activity. US Treasury yields rose across the curve, as expectations for a rate cut in 2026 declined toward 50%, while equities ended lower and the dollar strenthened.
Yesterday's session showed a risk-on sentiment, after news of Iran reportedly reviewing a peace proposal from the US increased the expectations of the conflict ending in the short term. Energy prices slid more than 2%, but have rebounded as of this morning as the strikes continue while the two countries review the terms.
Risk-off session to end the week, as concerns about high valuations in the technology sector and doubts on whether the Federal Reserve will lower rates in December, weighed on investor sentiment. Stocks sold off in the euro area and ended flat in the US, albeit having started the session with losses.
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.
In the last session of the week investors digested the US February jobs report, which gave mixed signs about the conditions of the labor market. In particular, the unemployment rate rose from 3.7% to 3.9%, while 275k new jobs were created, as opposed to the 200k expected. Treasury yields ended mostly flat and US equities fell following a strong rally.
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%.
In yesterday’s session, politics centered the stage in financial markets, following the resignation of UK Prime Minister Liz Truss due to the loss of confidence in her government. The Conservative Party is expected to present a new leader before the end of October and ahead of the release of the widely expected fiscal plan.
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.
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.
Investors digested the Fed's third rate hike of the year (see our detailed analysis of the meeting here) with moderate stock market gains, relatively unchanged sovereign yields, and a mixed behavior in FX markets, where the euro eased to $1.16 while some EM currencies appreciated (such as the Turkish lira the Brazilian real) and others weakened (such as Argentina's peso).
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.
In the last session of the week, investors' recession fears increased following the worse-than-expected economic sentiment data. In particular, July's Composite PMIs for the euro area and the US fell below the 50 points threshold, with decreases in both the services and manufacturing indices.
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.