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In yesterday’s session monetary policy continued to take center stage in financial markets. Investors positioned themselves ahead of today’s US Federal Reserve meeting (where no change in interest rates is expected and the focus will be placed on the dot plot) and weighed comments from ECB officials.

The future path of central bank official interest rates continued to be the main driver in financial markets, as investors reacted to the US Federal reserve meeting and to several ECB members’ speeches.

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%.

In yesterday’s session investors continued to assess the probability that the Fed will deliver 3-4 rate cuts this year given the strength of recent macroeconomic data. In particular, the February PCE deflator grew 2.5% y/y, up from 2.4% last month, and manufacturing activity rebounded sharply in March as the PMI increased to 50.3 from 47.8.

In yesterday's session, new data supported investors' expectations that interest rate cuts could begin this summer, which sent euro area and US sovereign bond yields down. Specifically, weekly unemployment benefit claims rose in the US, and the minutes from the ECB's March meeting confirmed officials are confident inflation is moving in the right direction.

In the first session of week, investors traded with an optimistic tone following the release of better-than-expected economic data in the euro area. In particular, the 2.1% m/m increase in Germany's industrial production in February hinted that one of the laggards in economic growth in the region for the past quarters might have bottomed out.

In yesterday’s session investors traded with a cautious mood as they await key US CPI data to be released this afternoon. Bloomberg consensus expects the headline and core indices to increase by 0.3% m/m, leaving the y/y rate at 3.4% and 3.7%, respectively.

Concerns about a hotter-than-expected inflation in the US centered the stage in yesterday’s session. In March, headline CPI rose by 3.5% y/y (3.2% in the previous month) and the core index rose by 3.8%, the same rate as in February.

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.

Markets ended the week on a risk-off tone, with sovereign bond yields falling across the board, equities selling off, and the US dollar strengthening (to $1,06 against the euro), as geopolitical tensions rose in the Middle East and investors sought safe-haven assets. Brent rose above $90/barrel as worries about potential supply disruptions mounted.

Stronger-than-expected March retail sales in the US casted further doubts on the Federal Reserve’s motives to cut interest rates as soon as this summer. Markets now price a mere 20% probability of a cut in June, and 50% for July.

Generalized risk-off sentiment in yesterday’s session as markets remained attentive to further developments in the Middle East and as expectations of interest rate cuts, especially in the US, are delayed. Sovereign bond yields rose across the board and equities sold off globally, while the US dollar ended slightly higher, and Brent held steady at $90/barrel.

Investors traded cautiously in yesterday's session amid geopolitical risks and a readjustment of interest rate expectations. In particular, investors’ uncertainty regarding the decision the Bank of England will make rose following the latest higher-than-expected inflation figures for March at 3.2% yoy vs. 3.1% anticipated by consensus. 

In yesterday’s session financial markets traded on the diverging outlook between the Federal Reserve and the ECB. Fed officials highlighted that inflation seems to have gotten stuck in the US and so they are in no rush to cut rates, while ECB members all pointed to June as the month they are looking at to lower interest rates.

Investors closed the week with a risk-off mood as they continued to eye communication from central bank officials and the tensions in the Middle East. On the latter, though, the attack suffered by Iran on Thursday night had a moderate effect on the price of the barrel of Brent in a sign that the conflict escalation seems to be controlled, for the moment.

Investors started the week trading cautiously as they await for key economic data releases (such as the Q1 GDP figures for the US on Thursday or today’s April flash PMIs) and for the corporate profits of 180 S&P500 companies, which represent about 40% of the index market capitalization (including five of the “Magnificent Seven”).

In yesterday’s session, investors had to weigh mixed economic data indicators, as flash PMIs showed how the manufacturing sector in the euro area weakened slightly in March, deep below the 50-points threshold, while the services index managed to increase (52.9 for the euro area).

In yesterday's session investors adjusted their interest rate expectations amid monetary policy and fiscal news in the euro area, while corporate profits centered the stage in the US.

In yesterday’s session, US Q1 GDP data release centered the stage in financial markets as it showed that, despite the moderation in headline GDP growth (+0.4% q/q from 0.8% in Q423), the US economy remains robust. The 0.6% increase in private consumption and the acceleration of investment (1.3%) were the brighter news in GDP.

Tuesday saw a risk-on mood in financial markets. In the US, retail sales data for May barely grew and showed a weaker than expected consumer, supporting hopes for interest rate cuts this year. Fed officials commenting during the day also highlighted good progress on disinflation, pushing Treasury yields lower and equities slightly higher.