Markets Eye Fed, ECB Minutes After Volatile Week

Global financial markets experienced turbulence last week as rising oil prices and bond yields heightened concerns about inflation and interest rates. U.S. equities initially struggled but recovered after cooler-than-expected U.S. core PCE data and a weaker-than-forecast non-farm payroll report. The U.S. added only 29,000 jobs in September, far below the expected 90,000, while the unemployment rate rose to 4.2%. The Nasdaq hit a record high driven by strong AI demand, but the S&P 500 dipped 0.3%, and the Dow Jones and European equities faced another tough week. The U.S. dollar climbed nearly 1%, marking its third straight weekly gain and reaching 18-month highs.

The focus remained on Treasury yields, which stayed elevated. The U.S. 10-year yield hit 5.34%, its highest since 2002, and recorded its strongest monthly gain in around two years. UK gilt yields and French bond yields also surged due to fiscal and political concerns. By week's end, market pricing showed only a 20% chance of a Fed rate hike in October, down from 65% the prior week. However, the market still priced an 87% probability of at least one rate hike by year-end.

This week, attention turns to U.S. services PMI data and consumer sentiment, which could provide further insights into the U.S. economy's health. The Fed's monetary-policy plans will also be scrutinized, with the minutes from the September meeting due Wednesday. Key Fed officials, including New York Fed President John Williams, have sounded more cautious about rapid rate hikes. Earnings from PepsiCo and Delta Air Lines will also be in focus.

The ECB will release the minutes of its September meeting on Thursday, where it raised interest rates by 25 basis points. ECB President Christine Lagarde noted that higher Treasury yields could tighten financial conditions, potentially reducing the need for further policy tightening. Eurozone inflation has risen to 3.8%, while core inflation crept higher in September. The euro has fallen to an 18-month low against the dollar, and the minutes could provide clues about the ECB's rate path amid stagflationary concerns and political uncertainties in France and Spain.