Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Chief Macro Strategist
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Fixed income market: the week ahead
Althea Spinozzi
Head of Fixed Income Strategy
Summary: It doesn't feel right waking up to Christmas week looking at the US yield curve steepening like a bad omen as the stock market is at an all-time high. The 2s10s spread has been widening to 2017 levels last week. Both the Global Financial Crisis and the Dot Com bubble have been preceded by a steepening of the yield curve. We expect yields to continue rise this week amid the vote of the $900 billion pandemic relief plan and the 20-year Treasury auction expected today. In the United Kingdom, 10-year Gilt yields may test the 0.10% benchmark bank rate as a new strain of Covid-19 has been found, and an agreement has not been reached regarding Brexit. Last Friday, BOE's Vlieghe said that the UK might need subzero rates leaving room for yields to continue to fall.
This week is going to be a short one with the market on Christmas holidays starting from Thursday. Yet, the financial market is giving signals that this might be the calm before the storm.
In the US the yield curve continues to steepen even though the 10-year yields are yet to break the pivotal 1% level. The spread between the 2- and 10- year yields at the end of last week rose to 82 basis points, a level last seen in October of 2017. The 5s30s spread has been widening steadily this year, to reach a level last seen at the end of 2016.
Adding pressure to rising yields this week it is the vote on the $900 billion pandemic relief plan as well as today's 20-year Treasury auction. Even though we expect the bonds to be well received, there is a chance for a weaker bid-to-cover ratio, caused by lower liquidity due to Christmas festivities. Thus, we might see yields pointing higher even though investors get ready to pop their champagne! We believe that at this point, the steepening of the yield curve cannot be dismissed even if yields are still trading at historic low levels. The steepening of the yield curve preceded the 2008 Global Financial Crises as well as the dot com bubble. Seeing the stock market ever high together with the yield curve steepening flashes all the warning signs.
In the United Kingdom, the appearance of a new strain of highly contagious Covid-19 virus adds on the uncertainties of a Brexit deal. The 10-year Gilt yields this morning have broken their support line at 0.20%, and they are descending towards the 0.10% benchmark bank rate. Last Friday Vlieghe, a BOE MPC member, said that the UK might need subzero rates for a full recovery. That's why in the next few weeks if a Brexit deal is not signed and the Covid-19 situation worsens we could see 10-year yields dipping below 0.10%.
In terms of data, we have gross domestic product figures coming out from several countries, which can also contribute to sovereign sentiment if they are worst than expected.
In conclusion, don't get too comfortable with the Christmas lull this year as it seems that the market is trading on a fine line.
Economic Calendar:
Monday, the 21st of December
- China: PBoC Interest rate Decision
- Italy: Trade Balance
- United States: Chicago Fed National Activity Index, US Treasury to auction 20-year bonds
- Eurozone: Consumer Confidence
Tuesday, the 22nd of December
- Australia: Retail Sales
- United Kingdom: Gross Domestic Product
- Germany: Gfk Consumer Confidence Survey
- United States: Gross Domestic Product Annualized, Core Personal Consumption Expenditures, Core Personal Consumption Prices
- Japan: BoJ Monetary Policy Meeting Minutes
Wednesday, the 23rd of December
- Australia: Trade Balance
- Japan: Leading Economic Index
- United States: Durable Goods Orders, Nondefence Capital Foods Orders ex Aircraft, Personal Spending, Initial Jobless Claims 4-week average, Michigan Consumer Sentiment, US Treasury to auction 5-year TIPS
- Canada: Gross Domestic Product
- Switzerland: SNB Quarterly Bulletin
Thursday, the 24th of December – Christmas Day
- Japan: Tokyo Consumer Price Index, Unemployment Rate, Retail Rate
Friday, the 15th of December – Christmas Day
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