Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Key points:
Equities: Asia equities rebounding. Inflation reports in focus. Dell shares plunge 18%.
Currencies: Dollar gives back most of its weekly gains
Commodities: A strong month is ending with a small weekly loss
Fixed Income: Euro area CPI for May and US PCE Deflator in focus
Economic data: US PCE Deflator
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Equities: Japanese and Hong Kong equities are up 1.3% and 0.9% respectively despite another negative session in US equities yesterday. Today’s key events are Eurozone May preliminary inflation figures and later the US April PCE inflation report which is the preferred inflation measure by the Fed. The market has recently repriced interest rate cuts globally as the global economy and inflation seem to be accelerating questioning the expected ECB rate cut next week. Costco shares declined 2% in extended trading despite earnings and revenue coming in stronger than expected. Dell Technologies shares plunged 18% in extended trading hours as AI server revenue did not rise as much as expected by investors derailing the whole repricing narrative of Dell that AI workloads would lead to significant shift in growth rates for the technology company.
FX: The US dollar slumped again yesterday, reducing the weekly gain for the Bloomberg Dollar Index to near zero, after US economic data sent dovish signals and brought yields lower. Fedspeak had little new message and continued to reiterate high-for-longer. USDJPY slid from highs of 157.60+ back below the 157-handle as intervention threat picked up, but yen still continues to be a favored funding currency for carry trades as we discussed here. AUDUSD traded steadily overnigh around 0.6640 after dipping below 0.66 on Thursday. Eurozone inflation print is on the radar today ahead of the likely ECB rate cut next week, and EURUSD traded higher to 1.0820.
Commodities: The Bloomberg Commodity index is heading for a weekly loss around 1%, reducing the monthly gain to 2.7% with weakness seen across energy led by natural gas and gasoline, and profit taking across the grains sector. A mixed industrial metal sector sees profit taking in copper being partly offset by higher aluminum prices with precious metals heading for another weekly gain led by silver’s resilience above USD 30 and gold trading higher despite headwinds from higher Treasury yields. EU gas trades higher amid competition from Asia where extreme heat is putting pressure on Asian power markets. Crude remains stuck near bottom of the range, weighed down by ample supply, and a raft of disappointing data from the US, China and Japan, as well as the market potentially challenging OPEC+ ahead of their Sunday meeting. Overall, the main focus today is the US PCE print and its potential impact on market risk sentiment and the outlook for US rate cuts.
Fixed income: Treasuries soared after a downward revision of the personal consumption and price index components of the first-quarter GDP. Gains were broad-based across the yield curve, with yields falling by 4.5 to 6.5 basis points across the curve, and 10-year Treasuries closing at 4.55%. The probability of a rate cut in November increased to 82%, with markets now anticipating a total of 34 basis points in rate cuts by the end of the year. Remarks from Fed officials provided further reassurance. Fed’s Williams expressed confidence that inflation would continue to moderate in the second half of the year. Meanwhile, Fed’s Bostic mentioned that a rate cut in July might be premature, although he remains open to the possibility if data supports it. On a more hawkish note, Fed’s Logan suggested that current policy might not be "as restrictive as we think." European sovereigns also gained , with 10-year Bund yields dropping by approximately 4 basis points to 2.65%, despite stronger-than-expected labor data showing an unemployment rate of 6.4% in April, compared to the expected 6.5%. Today’s focus is on key economic indicators: the Euro Area CPI for May, German retail sales for April, the US PCE inflation reading for April, and US personal income and spending data. Additionally, speeches from ECB’s Vujcic and Panetta, along with Fed’s Bostic, are iun focus.
Volatility: The VIX closed at $14.47 (+0.19 | +1.33%) on Thursday, dampening market sentiment. The VIX1D, which measures daily volatility, also increased significantly to 12.39 (+1.50 | +13.77%), indicating heightened immediate price fluctuations. Today's market volatility may be influenced by the pre-market release of the Core PCE Price Index figures. There are no major earnings releases scheduled that could impact overall market volatility. VIX futures are currently at 14.400 (+0.105 | +0.75%). S&P 500 and Nasdaq 100 futures are pointing to a lower opening, at 5242.50 (-10.50 | -0.20%) and 18541.00 (-65.50 | -0.35%) respectively. Yesterday's top 10 most traded stock options, in order: Tesla, Nvidia, Salesforce, Apple, Advanced Micro Devices, Microsoft, Amazon, Palantir Technologies, Robinhood, and American Airlines.
Macro: US economic data continued to show emerging cracks after Q1 GDP growth was revised down to 1.3% from 1.6% as consumer spending estimates eased from 2.5% to 2.0%. Price metrics such as Q1 PCE prices were also revised down. Meanwhile, weekly jobless claims for the week of May 25 were a notch higher at 219k (vs. 217k expected and 216k prev) signaling that labor market is loosening slowly and unemployment rate may rise. April PCE data today is the next key test of inflation dynamics in the US. The NY Fed President Williams was on the wires, but largely suck to the script. He acknowledged the lack of progress on lowering inflation but did suggest it should moderate in the second half of the year. He believes the policy is well positioned to get inflation back to target. Although there was no clear signaling on how many cuts may come this year, his comments continued to suggest that a rate hike is not on the table. Japan’s May Tokyo CPI jumped higher to 2.2% YoY on the headline from 1.8% previously, coming in as expected, signaling that the nation-wide print may face upside pressure as well. Inflation ex-fresh food rose to 1.9% YoY from 1.6% in April, although the core-core measure which excludes fresh food and energy came in softer at 1.7% YoY from 1.8% previously. The BOJ has been signaling further tightening, and this inflation print continues to leave room for the central bank to take further action to normalize policy and support the yen. China’s factory activity unexpectedly contracted in May, after the official manufacturing purchasing manager index fell to 49.5 in May, compared with 50.4 in April, and a forecast of 50.5. The reversal in manufacturing, after two months of gains, flags a threat to China’s economic growth target of around 5% this year. The country’s export-oriented industries are expected to play the crucial role in hitting that goal, with consumption at home still weighed down by a real estate slump
In the news: Trump has been convicted. Here’s what happens next (CNBC), DELL shares tumble as solid results, AI server orders fail to satisfy investors (Investing), Core inflation in Japan's capital accelerates, keeps BOJ rate hike view alive (Investing), Fed officials see inflation falling, signal no rush to cut rates (Reuters), Oil falls as US reports surprise fuel build, weak demand (Investing), Oil alliance OPEC+ could extend production cuts this weekend as focus shifts away from Middle East tensions (CNBC)
Macro events: UK Nationwide House Prices (May), exp 0.9% YoY vs 0.6% prior (0600), UK Mortgage Approvals (Apr) exp 61.5 vs 61.3k prior (0830), EZ Flash CPI (May) exp 2.5% and 2.7% core vs 2.4% & 2.7% prior (0900), US PCE Deflator (Apr) exp. 2.7% & 2.8% core, both unch from March (1230), Canadian GDP (Q1) exp 2.2% vs 1% prior (1230), Central bank speakers: Bostic (Fed)
Earnings events: No earnings today.
For all macro, earnings, and dividend events check Saxo’s calendar