Anna 
The January Purchasing Managers’ Index (PMI) survey has marked a significant shift, transitioning from a moderate decline in the Eurozone (EMU) to a mixed outlook in the United States. This change reflects the private sector’s increasing recovery momentum and rising input costs attributed to the Red Sea crisis. The survey indicates rapid output growth and cooling price pressures in the U.S., pointing towards a positive start to the year following a robust third quarter in 2023.
It is noteworthy, however, that the results come with a crucial caveat – cost pressures will need vigilant monitoring in the coming months as supply delays intensify, and the labor market remains tight.
The impact on core bond markets was particularly pronounced in the UK and the US. In the UK, the Bank of England seems less inclined to consider policy rate cuts, given the buoyant data and persistent inflation. UK gilt yields rose by 4 basis points at the front end, signaling a flattening of market trends.
In the US, the markets responded notably to the size of the positive surprise, suggesting a favorable beginning to the year. U.S. Treasury yields rose by 4 to 5 basis points, moving more parallel. German Bunds performed well, with yields falling by 1.5 basis points.
The dollar, initially subdued by strong bullish market sentiment, later benefited from PMI-driven interest rate support in the latter half of the trading day. EuroStoxx50 recorded a 2.2% increase, breaking out of a corrective trend channel in place since the start of the year. Strong fourth-quarter corporate earnings and substantial fiscal and monetary support from Chinese authorities contributed to the positive sentiment.
Looking ahead, the European Central Bank (ECB) is expected to keep key parameters of its monetary policy unchanged, following ECB President Christine Lagarde’s recent comments against aggressive market pricing of policy rate cuts. Lagarde mentioned “summer” as a potential starting point, contrary to the market’s 70% chance of an April move. The ECB is likely to maintain forward guidance, emphasizing that future decisions will ensure policy rates remain sufficiently stringent for as long as necessary. This outcome is anticipated to have a mild negative impact on long-dated bonds, with any gains for the euro expected to be restricted.
