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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.

The ECB lowered interest rates by 25bp and left the deposit rate at 3%. The central bank also removed a reference in its guidance to keeping interest rates sufficiently restrictive, a sign that further policy easing is probably coming. Following the meeting, the probability of a 50bp rate cut in January, instead of 25bp, has risen from 30% to above 60%.

In yesterday’s session, investors focused their attention to the ECB monetary policy meeting, where interest rates were left unchanged (depo and refi at 4.0% and 4.5%, respectively), and to Q3 GDP figures for the US, which grew at a  solid 4.9% SAAR rate with dynamic rates of growth of private and public consumption and residential investment.

The ECB monetary policy meeting yielded, as expected, no change in the official interest rates and a communication consistent with a first rate cut in June, at the next meeting. Christine Lagarde reiterated, though, that the ECB will be data-dependent and added that it will not be Fed-dependent.

China’s central bank triggered a risk-on mood in financial markets yesterday by introducing the largest stimulus package since the pandemic to support its faltering economy: it reduced reserve requirements for banks, cut a key repo rate, and lowered the mortgage rate for homeowners.

The Fed held its benchmark short-term interest rate and said it will continue to buy $80 billion in Treasury securities and $40 billion in mortgage-backed securities each month. Policymakers now see the first rate increase coming in 2023 instead of 2024.

Stronger-than-expected retail sales and industrial production data in the US renewed expectations of a soft-landing for the economy, just as the Fed is expected to lower interest rates today. Rate futures are reflecting a 65% probability of a 50 bp rate cut and a total of -116 bp over the remaining three meetings this year.

Economic activity data and central bank decisions centered the stage in yesterday’s session. On the one hand, the Bank of England kept interest rates unchanged and hinted that the next move could be a rate cut, as there have been “further encouraging signs that inflation is coming down”. The Swiss National Bank cut rates by 25bp to 1.50%.

Remarks by central bank officials took center stage in yesterday's session. From the ECB, Luis de Guindos reiterated that the ECB is on its path to cut interest rate as inflation data is on track to its 2% target. On the other hand, Fed Chairman Powell said there is no need to rush to lower rates given the strong economic backdrop in the US.

Today’s FOMC meeting remained the focus of investor attention in yesterday’s session, with markets currently pricing in the Fed to keep rates unchanged. On the data front, US new home construction fell to its lowest level since 2020 as higher mortgage rates in August appear to have cooled demand.

Investors ended the week by revising their expectations for future interest rates upwards as Friday’s US employment report for November beat expectations for job creation and a lower unemployment rate. This caused Treasury yields to rise across the board, as it should force the Fed to remain hawkish and potentially delay any interest rate cuts.

In the first session of the week investors traded cautiously as they wait for new messages coming from central bank officials on the interest rate path ahead. In particular, all eyes are on the ECB Governing Council meeting on Thursday, where the ECB is expected to keep rates unchanged and reiterate the data dependency approach for 1H2024.

In the last session of the week, investors reassessed their expectation for the Fed’s interest rate path ahead as the US April employment report showed a cooling labor market. In particular, job creation slowed from 315k to 175k, way below consensus expectations, the unemployment rate ticked up to 3.9% and wage growth decelerated to 0.2% m/m.

The Federal Reserve kicked off its monetary easing cycle with a 50 bp interest rate cut, taking the policy rate to 4.75%-5.00%. The FOMC cited "greater confidence" that inflation is moving sustainably to its 2% target and judged that the risks to its dual mandate are "roughly in balance". The committee sees rates falling another 50bp by year end.

The Federal Reserve left interest rates unchanged at 5.25-5.50%, as expected, and hinted that if inflation readings continue in the right direction, a September rate cut "could be on the table." Markets reaffirmed their expectation of three 25bp interest rate cuts for the remainder of 2024. Treasury yields fell by +10bp, and US equities rallied.

In yesterday's session, investors focused their attention on the Federal Reserve meeting, where interest rates were raised by 75bp to the 3.75%-4.00% target range. Crucially, president Jerome Powell explained that the pace of the upcoming hikes could moderate but that the terminal rate might be higher than previously anticipated. 

A strong US jobs report for January, with the unemployment rate falling 0.1 p.p. to 4.0% (the lowest since May) and wage growth accelerating to 4.1% yoy from 3.9% in December, reaffirmed expectations of a cautious Fed this year. Expectations for the next interest rate cut were delayed to July/September, and the probability of a second rate cut fell below 50%.