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Weak U.S. services sector data helped stabilize markets on Friday, partially reversing previous weakness that saw global stock and bond markets have one of their worst opening weeks in years.
The S&P 500 rose 0.2% by early afternoon after three consecutive days of losses, following data from the Institute for Supply Management.
Meanwhile, the benchmark 10-year bond yield fell to 4.01% from a peak of 4.10% just under 3 degrees.
Ever since the Federal Reserve signaled the end of its rate hike cycle last month, investors have been interpreting the weak numbers as a sign that a rate cut is imminent.
A series of hawkish comments this week and a strong jobs report early Friday have market participants worried that interest rates will remain high for longer than expected, with stocks and bonds off to their worst start to the year. The past 10 years will end.
In Europe, the region-wide Stoxx Europe 600 recovered from a drop of about 1% to close 0.3% lower. Earlier, closely watched inflation data for the euro zone came in slightly lower than expected.
Markets are now pricing in a less than 50% chance that the European Central Bank will cut interest rates for the first time in March, down from around 65% last week. Investors also lowered their expectations for a rate cut by the Bank of England.
The change in sentiment through Friday reflects growing expectations that if the Federal Reserve takes the lead in cutting interest rates in 2024, central banks will be forced to follow suit as the European economy generally weakens. After rising to , there was a sudden shock.
The minutes of the last Fed meeting, released on Wednesday, were then more hawkish than most expected, dampening investors’ hopes for imminent easing.
“From experience, people are usually a little hungover after a party,” said Mark Dowding, chief investment officer at RBC BlueBay.
He said hopes for a so-called soft landing for the U.S. economy, in which inflation returns to around the Fed’s 2% target without triggering a recession, risk being “disappointed if the data doesn’t conveniently fit this narrative.” he added.
Federal funds futures contracts currently price in a roughly 70% chance of the first rate cut in March. The probability was about 90% in December, but it had dropped to about two-thirds earlier this week. Fed rate setters expect three quarter-point rate cuts over the next 12 months, but the market is pricing in at least five.
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