In a tree by the brook, there’s a songbird who sings,sometimes all of our thoughts are misgiven. Led Zep

Last week’s further fall in the headline US  inflation increased the odds of 50bp. Ahead of their meeting, we get US retail sales data for August. It’s possible a weaker-than-expected report could tilt the balance further in favour of 50 basis points. In a speech last week, Janet Yellen did a magnificent job calming investor nerves, backing the soft landing scenario. As a result, the S&P 500 regained all of the previous week’s losses—quite an impressive recovery.  The ebb and flow in sentiment between growth and inflation will likely continue to influence US equity markets. How the Fed manages the messaging of this week, whichever decision it makes, will be crucial to how both equity and bond markets react. The most sensitive to changes in interest rate sentiment, the 2-year US treasury yield fell further to 3.57% by the end of the week.

I often discuss market sentiment, and there are many different ways to measure it. Recently, these surveys have tended to show an excess of optimism. One that paints another picture is the S&P Global Investment Manager Index survey. According to their latest reading, investor sentiment has been at its lowest level since May last year, and risk appetite is at its lowest level for 2 1/2 years—a combination of concerns about growth, political uncertainties, and valuations. Although fund managers do expect rate cuts to help support equity markets.

Ahead of the Bank of England’s meeting, we get the latest UK inflation data, where inflation will likely remain just above the Bank’s 2% target. Over the summer, we have seen a loss of momentum in our economy, with two successive months of unchanged GDP. The uncertainty of how exactly Ms Reeves plans to attack this 20 billion deficit and the constant downbeat message from No 10 might be weighing on economic sentiment. On Friday, it will be interesting to see the impact that the possibility of higher taxes has had on retail sales in the past month. The government hopes to raise a couple of billion quid by sticking VAT on school fees. That money has to come from somewhere, and that means a couple of billion less for restaurants, shops, and hotels as parents look to save on more discretionary spending and keep their children at their chosen school. The two billion is not magically invented; either that or children come out of private education, increasing the burden on the state education system.

The Bank of Japan also meets at the end of this week. Their decision to raise interest rates led to them being partly blamed for the August sell-off; they are expected to leave rates unchanged this time. Ahead of a highly anticipated week, equity markets are starting the week in Europe on a mildly positive note.

Finally, in what is a longer piece than normal, take a look at Mario Draghi’s rather downbeat assessment of the euro area economy, highlighting higher taxes and tighter regulation as part of the barriers to growth.