Evolution of the international financial markets and evaluation of the main events and economic indicators of the previous day session. Available in English.
Markets traded cautiously during yesterday’s session, ahead of key inflation US data releases today (Producer Price Index) and on Wednesday (Consumer Price Index). Sovereign bond yields edged higher on both sides of the Atlantic, with investors still pricing in a more "hawkish" Fed.
Unexpectedly strong US employment data released on Friday, posting 256,000 new jobs (165,000 expected) and a decrease in the unemployment rate (from 4.2% to 4.1%) cooled market expectations of interest rate cuts and drove treasury yields higher, especially for the policy-sensitive 2-Year bond.
In yesterday's session, global investor caution prevailed as markets awaited the release of U.S. employment data. Meanwhile, some Fed members commented yesterday that it is quite likely that interest rates will remain at current levels for a long time and will only be cut when inflation decreases.
Investor risk appetite eased slightly yesterday as government bond yields weighed on equities. In the eurozone, sovereign yields rose, curves flattened and peripheral spreads narrowed. Data released yesterday showed downside surprises in German retail sales and factory orders, and negative sentiment across the EU from the December EC's confidence indicators.
Tuesday's session saw a slight divergence in risk appetite on both sides of the Atlantic. In the US, a raft of data showed a dynamic economy: job openings unexpectedly rose in November; while the services PMI rose to 54.1 in December, and the prices paid component reached 64.4. Treasury yields rose on the news, with the curve steepening, weighing on equities.
Investors started the first full week of trading of the year with a slightly higher risk appetite than at the end of December. In the eurozone, German government bond yields rose after December CPI came in above expectations, while peripheral spreads fell as the final December PMI reading surprised to the upside across the eurozone, but especially in the periphery.
Following the FOMC meeting on Wednesday, during which the Fed signaled a cautious path ahead, euro area financial markets caught up to their US counterparts during yesterday's session. Sovereign bond yields rose by +6bp in the region, and the main equity indices ended sharply lower. Meanwhile, the euro traded around $1.03 against the dollar.
The Federal Reserve lowered interest rates by 25bp to 4.25-4.50% and signaled it will slow down the pace of cuts given its upward revision to the inflation forecast for the next two years. The Fed considered that the good health of the labor market and the little progress made on inflation in the recent months gives it room to act more cautiously from now on.
Investors traded cautiously ahead of today's FOMC decision (a 25bp interest rate cut is widely discounted) and the BoE on Thursday (expected to hold interest rates at 4.75%). On the macro data front, US retail sales rose 0.6% m/m in November, and in Germany, the IFO expectations index surprised to the downside as confidence in the country continued to weaken.
The advance PMI figures for December extended the recent trend of divergent growth between the US and euro area countries. The composite PMI in the US rose from 54.9 last month to 56.6, whereas the euro area composite index stayed below 50, albeit improving from 48.3 to 49.5, boosted by a recovery in the services sector (to 51.4).
Financial markets ended the week on a cautious tone as investors fully digested the ECB's decision to lower interest rates and as they positioned themselves ahead of the Fed's FOMC meeting later this week given the latest prices data: higher-than-expected import and producer prices during November.
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%.
US inflation for November came in line with expectations: headline inflation ticked up to 2.7% yoy (+0.3% mom), from 2.6% in October, and core inflation remained unchanged at 3.3% yoy (+0.3% mom). After the release, expectations for a Federal Reserve 25bp interest rate cut this month rose to almost 100%.