Financial markets had a mixed start to the week as investors tried to reconcile seemingly contradictory signals. In the eurozone, government bond yields fell after September's PMI showed a weak manufacturing sector weighing heavily on the core economies. A sharp, unexpected deterioration in the French services PMI also pushed up the country's spread.
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A larger-than-expected decline in US inflation in May, from 4.9% yoy to 4.0%, increased the odds investors attach to a pause in the Federal Reserve interest rate hikes at today’s meeting. Nevertheless, core inflation declined by less than expected, from 5.5% yoy to 5.3%, pushing the Fed to, at the very least, maintain a hawkish tone.
Investors traded under a cautiously optimistic mood on Tuesday, waiting for the outcome of the Federal Reserve meeting to be announced today. Consensus expectations look for a 50 bp hike in the policy rate as well as details of the plan to reduce the central bank’s balance sheet.
In line with expectations, the Federal Reserve raised its policy rate by 50 bp to the 0.75-1.00% range and confirmed a plan to reduce the size of its balance sheet (with a monthly cap of $95 billion). The Fed chair Powell noted that the recovery could withstand tighter monetary policy but also ruled out more aggressive rate hikes of 75 bp.
International investors remained cautious with no further progress in equity markets and stability for the sovereign yields after the geopolitical tensions intensified again at the beginning of the week.
Inflation eased below 2% in Germany and Italy in September (1.6% and 0.7% yoy, respectively), as it did in Spain and France. ECB President Lagarde remarked recent data has strengthened the central bank's confidence in the return of inflation to target, sending the probability implied by futures markets of a 25bp cut in the October meeting to 90%.
Small gains in most of the stock markets with the exception of the Spanish stock market that registered loses due to the tensions regarding the Catalan question.
European sovereign yields edged lower in yesterday's trading session following a speech by ECB chief Christine Lagarde in which she signalled further monetary easing. In her speech, Lagarde emphasised the importance of the duration, and not only the size, of monetary accomodation, and identified PEPP and TLTROs as the main crisis tools.
Markets ended last week on a high note on Friday as it became apparent that the US elections were nearing a result. The S&P 500 gained 7.3% over the week and US sovereign yields rose sharply. The election result was finally called on Saturday, in favor of Joe Biden, but Donald Trump announced that he would contest the results.
In yesterday's session, investors' expectations on inflation and the path central banks could follow in the coming months remained the key drivers. The moderation of US inflation in April (headline -0.2pp to 8.3% and core -0.3pp to 6.2%) suggests that the peak may have already been in March.
Negotiations to raise the US debt ceiling progressed over the course of Thursday, with both the Government and the opposition party suggesting talks were in a better place, though not finalised yet. Should a deal be reached soon, Parliament would have to approve it before June 1, the deadline stated by Treasury Secretary to run out of cash.
Tensions around the US debt ceiling negotiations continued weighting on investors’ sentiment. Even though the opposition leader, McCarthy, signaled optimism about a deal after the latest round of talks, rating agency Fitch Ratings warned the nation’s AAA rating may be downgraded due to the political standoff.
In yesterday’s session, the focus was still on monetary policy decisions, as the ECB decided to raise the official interest rates by 25 bp (depo and refi rate at 3.25% and 3.75%, respectively). Despite lowering the pace of rate increases, Lagarde clearly signaled that the ECB cannot pause rate hikes yet as inflation is still too much elevated.
Financial markets ended the week on a positive note, supported by stronger-than-expected employment data in the US (non-farm payrolls rose by 531k in October while the jobless rate edged down by 0.2 p.p. to 4.6%) and the approval by lawmakers in Washington of the $1.2tn infrastructure spending bill.
Investors continued to err on the side of caution on Wednesday, taking position ahead of the release of the Q1 GDP flash estimates for the US today and across the eurozone tomorrow.
Volatility continued to dominate across financial markets at the start of the week, fueled by mounting concerns about the health of the global economic recovery, after the release of weaker-than-expected monthly economic indicators for April in China on Monday.
Another session with mixed results across financial markets. The key themes were signs that inflationary pressures are abating coupled with data suggesting an economic slowdown. In the UK, the BoE raised policy rates by 25 pb to 4.5%, in line with expectations, while signalling that additional rate hikes are likely.
In the last session of the week, investors’ expectations on additional interest rate hikes by the US Federal Reserve were seen as more probable. That, together with debt ceiling concerns and an increase of inflation expectations seen in the University of Michigan survey, pushed US Treasury yields higher.
Equity markets extended a rally across the globe on Thursday, as investors continued to switch their focus away from the stress in the banking sector and instead pondered about the likely path of monetary policy decisions ahead.
Most of the developed stock markets kept registering small gains yesterday while yields on sovereign bonds picked up. In the U.S., the yield on the 10-year Treasury increased by 7 basis points and reached 2.55% for the first time in more than 9 months.