Investors continued to err on the side of caution, taking on board yet another round of hawkish signals from central bankers and incoming data pointing to lingering inflationary pressures and a strong US economy.
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Investors started the week trading with a more subdued tone, with sentiment soured by data showing a slowdown in China in Q2 and by lingering inflationary concerns on the back of upside tensions in some agricultural prices.
Investors started the week trading cautiously in a relatively quiet session, as they awaited for key economic data due to be released this week (e.g.: August euro area inflation and US labor market report).
Sovereign bond yields rose across Europe yesterday after an ECB survey showed consumer expectations for inflation edged up, which could pressure the ECB for further rate hikes. Inflation concerns were also stoked by Brent crude oil reaching a new year high after Saudi Arabia and Russia announced an extension of supply curbs through year's end.
Yesterday’s session saw subdued trading volumes and a risk-off sentiment. In the Eurozone, the downward revision of Q2 GDP growth figures prompted sovereign bond yields to fall. Renewed signs of industrial weakness in Germany stoked concerns of economic malaise and pushed down stocks as well.
In yesterday's session, the US CPI report of August centered the stage in financial markets. Headline inflation surged from 0.2% m/m to 0.6% due to an increase in gasoline prices- (3.7% y/y) while core inflation ticked modestly up from 0.2% m/m to 0.3% (4.3% y/y).
Financial markets ended the week digesting Thursday’s ECB rate decision. If investors initially interpreted Lagarde’s speech as implying a slightly dovish bias going forward, several ECB officials pushed back against such interpretations on Friday, pushing European sovereign bond yields up, peripheral spreads to widen, and a steepening of the curve.
Financial markets ended the week giving mixed signals from both sides of the Atlantic. In Europe, flash PMI data for September showed a slight improvement in business activity, albeit still signalling economic contraction amid a weak German manufacturing sector, pushing up government bond yields and dragging most equity indices lower.
Stock markets advanced in the US, Europe and Asia while sovereign yields remained stable. In Spain, markets underperformed their peers as stocks declined and sovereign spreads rose.
Investor sentiment improved amid diplomatic efforts to avoid the Israeli-Hamas conflict from spreading in the Middle East, with US Secretary of State Blinken arriving in Israel for talks and both President Biden and German chancellor Scholz planning a visit later this week.
In yesterday’s session, investors traded with mixed sentiment as they navigate through heightened tensions in the Middle East and a continued rhetoric of “higher for longer interest rates” supported by strong US economic data. President Biden arrived in Israel but has not been able to achieve major diplomatic breakthroughs to calm markets.
In yesterday’s session, investors traded cautiously amid mixed comments from central bank officials regarding interest rates’ paths ahead. In the euro area, ECB Chief economist Phillip Lane said that not enough progress has been accomplished in bringing inflation back to 2% and some other members did not rule out an additional rate hike.
In yesterday's session, expectations on monetary policy continued to center the stage in financial markets. In particular, Jerome Powell expressed, in similar words than at the last FOMC meeting, that official interest rates can be hiked again if needed and warned that a few months of good economic data should not mislead Fed members.
During Friday’s session investors’ sentiment was mixed as markets continued to digest Powell’s speech and hawkish remarks from Lagarde. The University of Michigan U.S. Consumer Sentiment Index dropped again in November for the fourth straight month to 60.4 (63.8 in October), and households’ expectations for long term inflation rose to 3.2%.
Financial markets started the week on a cautious note as investors await for US October CPI data released today. The consensus expects price growth to have slowed to 0.1% m/m from September's 0.4%, implying a 3.3% y/y change in October, down from 3.7% last month.
Euro area and US sovereign bond yields continued to fall during Friday's session as investors continue to expect interest rate cuts by mid-2024. Speaking last Friday, Federal Reserve chair Jerome Powell remarked that policy is "well into restrictive territoy" further fueling the rally in bond markets.
In yesterday’s session, investors traded cautiously amid weaker-than-expected economic data releases in the US. In particular, Q3 GDP was revised slightly downwards from 5.2% SAAR to 4.9% while the core PCE price index edged down in Q3 to 2.0% from 2.3%.
Economic data releases, central bank officials’ speeches and political developments were the main drivers of a session where US markets were closed due to Martin L. King’s Day. In Germany, 2023 GDP contracted by 0.3%, consistent with a 0.1% decline in Q4 2023 (which will be released on January 30th).
The FOMC kept US interest rates on hold, saying it needed more confidence that inflation was moving toward 2% on a sustainable basis before cutting rates. Powell later stated that the FOMC was unlikely to have such confidence by March.
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.