Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Chief Investment Strategist
The May 1 FOMC decision had a high bar for Chair Powell to surprise hawkish with markets having pushed back expectations of the first full rate cut to December and pricing in less than two rate cuts this year.
However, with three back-to-back reports of inflation coming back higher than expected, it was prudent for Chair Powell to address that. And he did. However, as some feared, he did not put rate hikes back on the table.
He said that future moves remained skewed to rate cuts, even though cuts have been delayed and the bar has been raised.
What was, however, more dovish was the announcement on balance sheet run-off or QT (quantitative tightening) tapering. Having flagged, in March, that it would be appropriate to slow the pace of asset runoff “fairly soon”, the FOMC duly delivered the taper to quantitative tightening that many had been expecting. Consequently, from the start of June, the cap on maturing Treasury securities rolling off the balance sheet will be lowered from $60bln per month, to $25bln per month, while the cap for mortgage-backed securities (MBS) will remain unchanged at $35bln per month.
Overall, the meeting outcome therefore tilted dovish. Rate decision and Chair Powell’s press conference were neutral, or rather avoided the hawkish turn suggested by market pricing. But a dovish surprise came from the QT tapering announcement. This can support risk assets for now.
Focus now shifts to the April non-farm payrolls or jobs data due on Friday. Here is what is expected by consensus:
Leading indicators are mixed but soft spots are seen more broadly:
This gives a sense that April employment report will once again bring a mixed picture of US labour market cooling but remaining incredibly tight, with job gains continuing at a strong pace, unemployment still low, and earnings growth starting to cool. And given the Fed’s dual mandate, the Fed needs to keep its policy options flexible.
Markets remain more vulnerable to a miss, which can spark dovish repricing easily. This is likely to see equities and Treasuries rallying, while the dollar will soften. USDJPY could threaten a move back towards 155 while AUDUSD could re-test the 100DMA around 0.6585. Gold and silver could also extend gains.
Meanwhile, a hawkish surprise will only come if the beat is significant. Tech and AI sectors in equities will likely see a sell-off if the jobs data surprises to the upside. Dollar strength is also likely to stay measured, and USDJPY is unlikely to revert to 158+ levels.
Other recent Macro/FX articles:
2 May: Global Market Quick Take - Asia
30 Apr: AUD: Retail sales miss questions RBA market pricing
29 Apr: Weekly FX Chartbook: Fed’s hawkishness meets BOJ’s dovishness
29 Apr: Macro Podcast: Japanese drama - what's next for the yen?
26 Apr: JPY: Bank of Japan adds to reasons to stay bearish yen
25 Apr: JPY: Accelerated sell-off; can the BOJ halt yen's decline?
25 Apr: Thematic Podcast: Deciphering Asian forex interventions
23 Apr: Technical Update - USDJPY ticking higher. EURJPY and AUDJPY at key resistance levels. GBPJPY range bound, bullish breakout?
23 Apr: GBP: What can drive the next leg lower?
22 Apr: Weekly FX Chartbook: Stretched USD strength is raising intervention alert
19 Apr: FX 101: Using FX for portfolio diversification
18 Apr: JPY: Intervention alert, or a BOJ alert?
16 Apr: Chinese Yuan’s Double Whammy - Dollar Strength and Yen Weakness
12 Apr: Riding the Fed-ECB Policy Divergence
11 Apr: ECB rate decision: How to trade the event
9 Apr: CAD vulnerable as market underprices dovish Bank of Canada risks
9 Apr: US inflation report: How to trade the event
8 Apr: Macro and FX Podcast: NFP, CPI, ECB and Japan
3 Apr: Chinese yuan bears are undeterred by PBoC’s grip
3 Apr: FX Quarterly Outlook: The rate cut race shifts into high gear
8 Feb: FX 101: USD Smile and portfolio impacts from King Dolla