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Investors started the week in a mildly risk-on mood, with sovereign bond yields falling across the board. In the Eurozone, ECB officials speaking on Monday seemed confident about a future rate cut, although they remained inconclusive on the exact timing of it. US yields were weighed down by the Treasury's lower than expected Q1 borrowing forecast.

Markets kicked off the week in a rather calmed tone as investors await key economic data this week which will provide them further clues regarding future interest rate cuts. On the data front, NY Fed’s January Consumer Expectations Survey found that respondents expect 1-year inflation to remain at 3%, the lowest reading in three years.

In the last session of the week, higher-than-expected US PPI inflation data in January (0.3% m/m from -0.1% in the previous month) pushed back the expectations of interest rate cuts from the Federal Reserve and favored an increase in sovereign bond yields on both sides of the Atlantic.

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.

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.

The Federal Reserve kept the federal funds rate unchanged at the 4.25%-4.50% range and highlighted that the risks of higher inflation and higher unemployment have risen. The decision had been widely discounted by markets and had little impact on financial assets. Markets still expect three cuts in 2025, starting in July, and Treasury yields ended the session mostly flat.

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.

Investors ended the week on a cautious, yet slightly positive note. All eyes were on the trade talks between China and the US that took place over the weekend. Trump floated in social media an alternative tariff level of 80% on Friday (compared to the current 145%). Both sides have touted progress in the talks, but have offered few details so far.

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.

Financial markets reversed part of the large movements from the previous session following the US January CPI report. Sovereign bond yields fell on both sides of the Atlantic, while equity markets recovered most notably in the US.  The VIX volatility index fell below 15 once again.

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.

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.

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.

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 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.