Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Key points:
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
In the news: Japanese Central Bank Raises Interest Rates for Second Time Since 2007 (Bloomberg), AMD stock pops on better-than-expected outlook, AI sales (Investing), Microsoft sinks, chipmakers climb as AI rally faces divide (Yahoo), Rio Tinto half-year profit meets estimates, expects good demand in China (Investing), Intel plans to cut thousands of jobs to finance recovery, Bloomberg News reports (Yahoo), Fed Expected to Hold Rates and Signal September Cut (Bloomberg), Kamala Harris Wipes Out Trump’s Swing-State Lead in Election Dead Heat (Bloomberg)
Macro: US JOLTS job openings fell to 8.18mln from the prior 8.23mln which was revised higher from 8.14mln. The vacancy rate was unchanged at 4.9%, while the quits rate was also unchanged at 2.1%, but the prior saw a revision lower from 2.2%. This was the lowest quits rate since early months of the pandemic, is a level that is consistent with further moderation in wage growth to a pace consistent with the Fed's 2% inflation target. US consumer confidence rose in July to 100.3 (exp. 99.7), from a downwardly revised prior of 97.8 but remains within the narrow range that has prevailed over the last two years. The Present Situation index declined to 133.6 from 135.3, with the Expectations improving to 78.2 (prev. 72.8). German CPI for July showed that disinflation progress may have slowed. Headline CPI came in at 2.6% YoY from 2.5% in June, slightly above expected. Euro-are inflation figures for July are due today. Meanwhile, The Bank of Japan has lifted its benchmark interest rate to 0.25 per cent and outlined plans to halve its monthly bond-buying programme from ¥6tn ($39bn) to about ¥3tn in January to March of 2026. “The bank judged it appropriate to adjust the degree of monetary accommodation from the perspective of sustainable and stable achievement of the price stability target of 2 per cent,” it said in a statement. With the US Federal Reserve set to move in the opposite direction, the BoJ’s shift to tighter policy will start to narrow an interest rate gap that has been driving record weakness in the yen, marking a big shift for global currency markets. China’s official manufacturing PMI fell to 49.4 last month from 49.5 in June, and the gauge has now stayed below 50 in contraction mode for the past three months. The non-manufacturing measure of activity in construction and services fell to 50.2, below a median forecast of 50.3 and suggesting a slowdown in expansion from June
Macro events (times in GMT): EZ Flash CPI (Jul) exp 2.5% vs 2.5% (0900), US ADP (Jul) exp 150k vs 150k (1215), Pending Home Sales (Jul) exp 1.4% MoM vs –2.1% prior (1400), Chicago PMI (Jul) exp 45 vs 47.4 prior (1345), FOMC Announcement at 18:00 (preview here)
Earnings events: Microsoft reports F24 Q4 earnings beating overall revenue estimate but missing on cloud revenue leading to a drop in stock price of 7% in after-hours on the earnings release. Advanced Micro Devices (AMD) posted Q2 earnings surpassing expectations and release strong Q3 revenue forecast boosting shares in after-hours. Starbucks shares jumped 5.3% to $80 in post market after reaffirming full-year guidance, signaling successful turnaround efforts. Samsung Electronics reported fastest net income growth since 2010, plans to double high-end chip production for AI. Q2 net income surged six-fold to 9.64T won ($6.96B), beating forecasts.
For all macro, earnings, and dividend events check Saxo’s calendar.
Equities: Stocks erased early gains as declines in heavyweight chip companies pressured tech-exposed equity indices, while markets assessed recent data and geared up for the Federal Reserve’s policy decision tomorrow. The Nasdaq 100 closed 1.3% lower, reaching its lowest level in nearly two months, while the S&P 500 fell 0.5%. Nvidia dropped 7%, triggering widespread selling pressure on other semiconductor giants and extending the sector's period of weakness as investors question the sustainability of the AI rally, shifting their focus to more traditional sectors of the US economy. Microsoft fell as much as 3% post-market after reporting a miss on cloud revenue, while AMD rallied 7.6% after reporting earnings that surpassed expectations and issued a strong Q3 forecast. On the other hand, Apple, Alphabet, and Meta experienced muted activity ahead of their reports later in the week. Merck sank 9.8%, and Procter & Gamble plunged 4.8% following their respective results. Still, the Dow gained 205 points, extending its outperformance over tech-heavy counterparts, supported by banks and insurers.
Fixed income: Tuesday was volatile for bond markets, beginning with European data indicating that German inflation accelerated in July and Eurozone GDP grew more than expected in the second quarter. By the end of the day, European sovereign yields fell broadly on expectations that the ECB will continue to cut rates and the BOE will soon follow. U.S. Treasury yields initially rose in the morning session following higher-than-expected June JOLTS job openings and July consumer confidence but ended the day lower due to the Israeli strike in Lebanon. The U.S. yield curve steepened, with five- and ten-year yields hitting session lows in the afternoon at 4.02% and 4.13%, respectively, their lowest levels since March. Trading volume remained light as traders awaited today's FOMC meeting and Friday's July employment report. Bond futures are pricing in at least two quarter-point Fed rate cuts this year, starting in September, although a rate cut today is considered unlikely. New Treasury issue supply is on hold until August 6, with auction sizes to be announced Wednesday morning. At the refunding announcement, Treasury officials expect steady note and bond auction sizes for the next few quarters, but consensus sees inevitable increases. The BOJ hiked interest rates for the second time since 2007 and is looking to halve bond buying, markets are expecting Governor Ueda’s press conference for more details.
Commodities: Gold climbed to USD 2420 overnight, supported by increased tensions in the Middle East with today’s FOMC meeting also in focus. Silver meanwhile trades back above USD 28 after hitting a 12-week low, supported not only by gold but also copper which is showing signs of stabilising above USD 4. Crude oil trades higher with Brent near USD 80, partly reversing recent losses following the killing of a Hamas leader, and after the API reported a 4.5mn drop in US crude stocks. Despite the mentioned gains during the past 24 hours, the commodity sector is heading for a +4% loss on the month, its worst performance in 14 months driven by China growth concerns forcing long liquidation from speculative accounts across key commodities from energy to industrial metals.
FX: The Japanese yen whipsawed following the BOJ decision to hike rates to 0.25 bps, initially rising to 151.64 against the dollar before being little changed around 153 as the market awaits Govenor Ueda’s briefing. The Swiss franc also gained in Asia amid escalating Mideast tensions fueling safe-haven flows. Meanwhile, the US dollar also remained supported despite the stronger yen while the resilience of the British pound is coming under scrutiny as the Bank of England decision draws closer and an August rate cut remains a coin toss. The Australian dollar traded sharply lower, hitting a near three-month low after a surprise drop in core inflation lifting the chance of a rate cut before yearend to 67%.
Volatility: Yesterday saw a surge in market volatility, as anticipated due to several key events this week, including big-tech earnings, the FED press conference, and unemployment data. After market open, the VIX spiked above 18, peaking around 19:00 (Brussels time) before dropping back below 17. The VIX closed at 17.69 (+1.09 | +6.57%). After hours, Microsoft reported earnings that exceeded analyst expectations across the board, except for its Azure cloud business, which grew 29% versus the expected 30%. This caused Microsoft's stock to drop 7% after market, pushing the VIX back up to almost 18, highlighting market nervousness. VIX futures fell to $16.350 (-0.135 | -0.82%) this morning. Expected moves for today, derived from options pricing, are significantly higher than yesterday's: the S&P 500 with an expected move of plus or minus 57.97 points (+/- 1.07%) and the Nasdaq 100 plus or minus 301.12 points (+/- 1.60%). Futures for the S&P 500 and Nasdaq 100 show a more positive sentiment, with S&P 500 futures at 5,495.00 (+22.50 | +0.41%) and Nasdaq 100 futures at 19,107.00 (+170.75 | +0.90%). Markets closed Tuesday with the S&P 500 at 5,436.44 (-27.10 | -0.50%) and the Nasdaq 100 at 18,796.27 (-263.21 | -1.38%). Today's key economic events include the ADP Nonfarm Employment Change and the FOMC Statement at 20:00, followed by the Fed Interest Rate Decision and FOMC Press Conference. Today's notable earnings include Meta Platforms, Mastercard, Qualcomm, and Arm Holdings, all reporting after the bell.
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