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Investors closed the week extending their appetite for risk, albeit consolidating and taking profits after the rebound recorded across asset classes in the previous sessions. Sentiment was also lifted by a positive start of the Q2 corporate earnings seasons, with better-than-expected results for the reporting large US banks.

Financial markets ended the week with a risk-on session following the release of the US PCE deflator, the Fed’s preferred inflation measure, which came mostly in line with expectations at 2.7% yoy (+0.3% mom) up from 2.5% in the previous month. Furthermore, US personal spending data beat expectations advancing 0.8% in March vs 0.6% estimated.

In yesterday’s session, US Q1 GDP data release centered the stage in financial markets as it showed that, despite the moderation in headline GDP growth (+0.4% q/q from 0.8% in Q423), the US economy remains robust. The 0.6% increase in private consumption and the acceleration of investment (1.3%) were the brighter news in GDP.

In the last session of the week, investors reassessed their expectation for the Fed’s interest rate path ahead as the US April employment report showed a cooling labor market. In particular, job creation slowed from 315k to 175k, way below consensus expectations, the unemployment rate ticked up to 3.9% and wage growth decelerated to 0.2% m/m.

Markets were mixed in yesterday's session as uncertainty about the situation in France and the US government shutdown continued to dampen investors' sentiment. Sovereign yields edged higher on both sides of the Atlantic and the euro weakened to $1.15 against the dollar. Euro area stocks were mixed and US stocks fell as the tech-fueled rally took a pause.

As expected, the Federal Reserve lowered the federal funds rate by 25bp to 3.50%–3.75%. Following the announcement, Treasury yields fell, U.S. equities advanced, and the dollar weakened, leaving EUR/USD trading near 1.17. After three consecutive rate cuts, the Fed signaled it will likely pause to assess how the economy evolves.

Risk appetite returned to the fore on Tuesday, as investors reassessed the outlook for monetary policy across major central banks in the aftermath of the turmoil generated by the collapse of two regional banks in the US.

In yesterday's session, the release of May's flash PMIs for the main advanced economies and corporate earnings took center stage in financial markets. On the former, the manufacturing and services indices rose in the US, leaving the composite index at 54.4 (a two-year high).

The last stages of this cycle of monetary policy tightening centered the stage in yesterday’s session as the ECB hiked interest rates by 25bp (depo at 3.75% and refi at 4.25%). Nevertheless, Christine Lagarde said that this might not be the last hike and insisted that interest rates will remain high for a long period of time to break the back of inflation.

US Treasury yields dropped along the curve after the ADP survey showed an unexpected decrease of private payrolls in November, suggesting further weakness of the job market and consolidating views on a rate cut by the Fed next week. In consequence, the dollar depreciated against all its main peers.

Investors ended the week on a mixed note after US December jobs data showed the unemployment rate falling to 4.4%, prompting markets to push back expectations for the next Fed rate cut from March to June. As a result, 2-year Treasury yields edged higher and the US dollar strengthened. Equities nonetheless advanced to new highs.

Financial markets recorded yet another session with high volatility, with the key drivers remaining the direction of monetary policy, the escalation in tensions with Russia and the strength of the USD.

In the first session of the week, investors traded with optimism, after the worse-than-expected US ISM data for September let traders to think the Fed could pursue a less aggressive monetary policy stance than previously expected. Nevertheless, NY Fed President John Williams said that there is still job to do to curb inflation.

In yesterday's session, investors maintained their appetite for riskier assets, after a drop in the number of job vacancies in the US fueled expectations of a monetary policy pivot from the Fed. In this direction, the central bank of Australia decided to hike rates by 25bp, slowing down the pace of its tightening.

In the last session of the week, investors continued to trade with a risk-off mood amid continuing turmoil in the financial system. Doubts about the health of the banking sector led traders to think that central banks will have to stop hiking rates and start cutting them soon.

Monetary policy tightening centered the stage again, with several US Federal Reserve members arguing that interest rates needed to be hiked further and that there were no clear signs of inflation having peaked yet. In the euro area, the accounts of the last ECB meeting revealed a broad-based concern of GC members about current inflation figures.

As expected, the Federal Reserve maintained its policy rate in the 3.50%-3.75% range. Fed Chair Jerome Powell struck a somewhat hawkish tone, highlighting activity strength, labor market stabilization and elevated inflation. Treasury yields ended the session flat and the dollar rebounded from its sharp decline since last Friday, gaining against the euro and the yen.

Investors ended the week with a mixed session as the US government shutdown, which prevented the release of the employment report, clouded sentiment. Sovereign yields edged lower in the euro area and stocks mostly advanced, while US Treasury yields ended higher, and equities were mostly flat weighed down by the underperformance of tech stocks.

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.