Financial Markets Daily Report

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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.

In the last session of the week, investors focused their attention on the disinflationary pressures in the US, after December PPI unexpectedly declined by 0.1% m/m (-0.1% in the previous month). In this context, yields on sovereign bonds declined on both sides of the Atlantic, particularly so in the short-end of the curve. 

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.

Yesterday’s session saw investors in a wait-and-see mode ahead of today’s key US inflation report, which is expected to shed some light on the Fed’s next interest rate decisions. Sovereign bond yields rose slightly across the board as Fed’s Williams cooled expectations of imminent rate cuts, saying the Fed still has room to cover to reach inflation’s 2% target.

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, government bond yields fell slightly on both sides of the Atlantic. In the eurozone, German export data for November, which surprised to the upside on the back of strong EU demand, contributed to the move. In the US, the NY Fed’s metric of consumer’s one-year inflation expectations fell to 3.01%, the lowest level in almost three years.

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.

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%.

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.

In yesterday's session investors traded with a somewhat risk-on mood as they downplayed the messages from central bank officers. From the US Federal Reserve, Raphael Bostic said that inflation will come down relatively slowly, which will not urge a fast change from the restrictive monetary policy stance.

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).