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Weak service sector figures steadied markets on Friday, partially reversing earlier weakness that had left global stock and bond markets on course for one of their worst opening weeks in years.
The figures, from the US Institute for Supply Management, sent the S&P 500 0.5 per cent higher by mid-morning, countering a three-day losing streak, while benchmark 10-year bond yields slid from a three-weak peak of 4.10 per cent to 3.97 per cent.
Since the Federal Reserve last month signalled a likely end to its interest rate-rising cycle, investors have interpreted weaker numbers as a sign that rate cuts may come soon.
A string of hawkish comments this week — and strong jobs data earlier on Friday — had worried market participants that rates were set to stay higher for longer than they had hoped, putting stocks and bonds on course for one of the worst starts to the year in the past decade.
Before Friday, global bond markets were on course for their worst start to a year in 14 years, as measured by the Bloomberg Global Aggregate index.
In Europe, the region-wide Stoxx Europe 600 recovered from losses of about 1 per cent to trade 0.25 per cent lower. Earlier, closely watched eurozone inflation numbers came in slightly below expectations.
The shift in sentiment before Friday had come as an abrupt shock after a rally into year-end on rising expectations that where the Federal Reserve would lead with interest rate cuts in 2024, Europe’s generally weaker economies would force its central banks to follow.
Then the minutes of the Fed’s last meeting, published on Wednesday, painted a more hawkish picture than many had hoped, leading investors to lower expectations for any imminent easing.
Last quarter’s “everything rally” has hit a wall as a result. “Experience suggests that after a party, there is normally a bit of a hangover to follow,” said Mark Dowding, chief investment officer at RBC BlueBay.
He added that hopes of a so-called soft landing for the US economy, in which inflation falls back to around the Fed’s 2 per cent target without triggering a recession, risked being “disappointed if data do not conform conveniently to this narrative”.
Fed funds futures contracts are currently pricing in about a 75 per cent chance of the first rate cut coming in March. In December, the probability was about 90 per cent and fell to about two-thirds earlier this week. While the Fed’s rate-setters have forecast three quarter-point rate cuts over the next 12 months, markets have priced in at least five.