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Markets took a pause after last week’s rally which brought the main stock indices to post their best monthly advance in years, and sovereign bond yields their largest monthly cuts in two years. Investors have now turned cautious ahead of this week’s US employment data while still pricing in the likelihood of interest rate cuts as soon as March 2024.

Investors started the week on a subdued note as they await key central bank meetings and data releases this week. Sovereign bond yields were little changed ahead of today's US CPI report. Yesterday, the NY Fed's 1-year inflation expectations index for November extended its decline to 3.4% showing the impact of interest rate hikes.

US November CPI report came mostly in line with expectations: prices grew 0.1% MoM (vs. 0.0% expected) and 3.1% YoY (as expected) down from 3.2% in October, reinforcing the view the Fed will leave rates unchanged at its meeting today. The lack of surprises left markets rather muted, with treasury yields flat and stock indices slightly advancing.

Yesterday’s FOMC meeting boosted investor sentiment as the Fed sent a strong signal that the hiking cycle is over and that its members expect at least two rate cuts in 2024 (according to the median of the Dot-plot projections). This caused government bond yields to fall across the board, especially US Treasuries.

The ECB's caution regarding a pivot in its hiking cycle weighed on investors in yesterday's session. Lagarde's press conference appeared hawkish in contrast to Powell's and the Fed's dot plot on Wednesday, which cooled market expectations for rate cuts in 2024 in both sides of the Atlantic.

In the last session of the week, investors focused their attention on the ECB and Fed officials’ speeches, which tried to push back against the expectation for early interest rate cuts.

In yesterday's session, investors traded without major economic references, beyond the Germany IFO which confirmed weakness in business sentiment, and amid continuing comments from central bank officials trying to push back against the expectation of the first interest rate hike (e.g.: ECB's Stournaras and Fed's Mester). 

In yesterday’s session, investors focused their attention to macroeconomic data releases. In the UK, inflation decreased by more than expected in November, from 4.6% to 3.9% the headline index and from 5.7% to 5.1% the core, reinforcing the idea that the BoE might start cutting rates in the first half of 2024.

Investors are starting the year cautiously as risk appetite seems to have eased over the holidays. As central bank officials tried to push market expectations of imminent rate cuts, although these expectations remain anchored in March for the Fed and April for the ECB, government bond yields rose across the board, particularly in the euro area.

Market sentiment remained subdued on Tuesday as investors awaited Thursday’s US inflation report for December, which could shed some light on the Fed’s future interest rate decisions. In this context, government bond yields rose in the eurozone, despite the negative surprise from German industrial production for November, and fell slightly in the US.

In yesterday’s session, investors took a mildly positive view of December’s US CPI report, which confirmed the disinflationary momentum in the US economy, even though the headline figure was higher than expected. Government bond yields fell on the news and the market's discounted probability of a Fed rate cut in March rose.

Central bank officials continued to push against the expectation of as many as six interest rates cuts in 2024. Yesterday, was Fed’s Christopher Waller turn, who suggested moving not as quickly as in previous easing cycles.

Global financial markets were mixed in the last session of the week as investors continue to navigate through interest rate cut expectations and new economic data. US University of Michigan consumer sentiment index improved to 78.8, the highest reading since July 2021, boosting the stock market and bringing the S&P 500 to a new record high.

In the final session of the week, market sentiment was mixed on both sides of the Atlantic. In Europe, government bond yields remained fairly flat following Thursday’s ECB meeting, after which investors see a first rate cut in April as more plausible. Major European stock market indices rallied on this expectation, posting a week of strong gains.

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.

In the last session of the week, investors traded with a risk-on mood as their economic optimism outweighed concerns of a tighter monetary policy stance by the US Federal Reserve. The release of January employment report in the US showed that its labor market remains tight, with 353k more payrolls and the unemployment rate still at 3.7%.

In the first session of the week, investors continued to reassess their expectations on the upcoming easing of the ECB and Fed’s monetary policy stance. The January PMI and ISM data releases showed a stronger-than-expected start of 2024 that decreased further the probabilities of seeing the first rate cut in April and May for both central banks.

In a session with no big economic data releases, except for the -1.1% m/m December retail sales in the euro area, investors reassessed their expectation on the upcoming central bank interest rate cuts.

In a session without any major economic news, investors traded cautiously as they continued to assess the probability of future interest rate cuts given the current inflation and activity dynamics.

The week ended with markets trading without a clear direction as investors continued to monitor central bank officials' speeches to adjust their expectations of the timing of the first interest rate cuts, and as they awaited key economic data to be released this week.