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In the last session of the week, the awaited release of the September US employment report changed investors’ expectations of the path of interest ahead. Non-farm payrolls increased by a 336k, notably above expectations, and the two previous months were revised by 119k higher. The unemployment rate remained unchanged at 3.8%.

Investors’ concerns over economic growth outlook ahead, and the decrease in the probability of an additional interest rate hike from the US Federal Reserve this year were the main drivers in yesterday’s session.  

Investors’ perception that  central banks will still need to increase interest rates in this hiking cycle was the main driver in yesterday’s session. The release of the last ECB meeting minutes and the somewhat higher-than-expected September CPI inflation data for the US fueled this expectation.

Solid US economic data released yesterday showed a still resilient economy reinforcing the the case for the Federal Reserve to keep interest rates higher for longer. September US industrial production rose to the highest level in nearly five years to 103.6 and retail sales increased 0.7%, up from 0.6% beating expectations.

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 the last session of the week, investors traded with a risk-off mood amid fears of a escalating conflict in the Middle East. The VIX index, despite remaining at historically moderate levels, reached its highest level since March and stock indices declined across the globe.

The week started off with a volatile session as markets await key economic data this week (PMIs for advanced economies and US 3Q GDP), 3Q euro area Bank Lending Survey, the ECB's rate decision, further 3Q earnings, and news from the Middle East.

In yesterday’s session, investors traded cautiously focusing their attention on the corporate earnings season and being attentive to the monetary policy path ahead and to the geopolitical risks. In this context, yields on sovereign bonds surged in advanced economies, with the 10-treasury getting closer to 5%.

Volatility rose during the last session of the week amid heightened tensions in the Middle East, mixed corporate earnings, and expectations of the FOMC meeting later this week. Stocks fell across the globe, with US and European stock indices entering “correction” territory after falling 10%  their most recent peak in July.

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. 

Financial markets rallied globally following lower-than-expected US consumer prices. October CPI was unchanged m/m from September (vs. 0.1% expected) and rose 3.2% y/y (vs. 3.3% expected), down from September’s 3.7%. The market now expects the Fed to cut rates in May, ahead of June as was priced before the release of inflation data.

Yesterday markets took a pause following Tuesday’s strong rally. Investors continue to price in the end of the interest rate hiking cycle while still digesting new economic data. US October retail sales slowed in October by less than expected (-0.1% m/m vs. -0.3%), suggesting some resiliency in consumption and reinforcing the idea of a soft-landing.

In yesterday's session sovereign bonds took center stage once again. Yields extended their declines both in the euro area and in the US, where higher-than-expected weekly jobless claims pointed to a cooling labor market and gave investors further reasons to believe the Federal Reserve is done hiking rates.

In the last session of the week, investors continued to digest the patient approach for the monetary policy ahead expressed by ECB and US Federal Reserve officials. For example, San Francisco Fed President Mary C. Daly said that the Fed could take its time to do things right, signaling that no further rate hikes are in sight for the moment.

The week started in a subdued mood in financial markets, with investors still assessing the implications of the patient approach of central banks on monetary policy. Yesterday, ECB member de Cos followed previous comments from Wunsch and Holzmann and said that it is premature to talk about interest rate cuts.

Investors continued to trade cautiously yesterday amid messages from central banks signaling the end of the interest rates hiking cycle. Nevertheless, Christine Lagarde said that more evidence is needed to be sure that inflation returns sustainably to the 2% target.

Investors started the week on a downbeat note, with sovereign bond yields falling across the board on both sides of the Atlantic, as expectations grew that major central banks may be done with interest rate hikes. In the Eurozone, however, Lagarde stressed that strong wage growth does not yet allow the ECB to declare victory over inflation.

In Tuesday’s session, investors continued to focus on the narrative that US growth is slowing and that the next move by major central banks will be to cut interest rates at some point next year. This extended the market’s risk-on sentiment of recent weeks, with government bond yields falling across the board and major equity indices rising.

Government bond yields extended their losses across the board on Wednesday as investors continued to focus on future interest rate cuts by major central banks. These expectations were boosted by upwardly revised Q3 US GDP growth figures and better-than-expected November inflation figures in Germany and Spain.

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.