Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Summary: Equities headed lower after the hot US PPI report and hawkish Fed speakers Mester and Bullard bringing the market’s terminal rate projections up to 5.27%. US 10-year yields surged to a YTD high of 3.9% and the US dollar was broadly higher against all other currencies but the yen recovered some of its losses as the session ended. RBA’s Lowe touted more rate hikes as inflation reigns. Metals saw a rebound with Copper leading, while Gold was still close to $1830.
U.S. stocks opened sharply lower on a much hotter-than-expected PPI print. The benchmark S&P 500 and Nasdaq 100 managed to claw back all the losses until they reversed following Fed’s Bullard hit the tape at 3 pm New York time with hawkish comments signaling the door to return to a 50bp hike at the March FOMC is open. The Fedspeak hammered stocks across the board with all 11 sectors in the S&P500 declining. At close, the S&P500 was 1.4% lower and the Nasdaq 100 lost 1.9%.
Tesla (TSLA:xnas) declined 5.7% following an announcement to recall over 300,000 cars due to a crash risk associated with its Full Self-driving Beta software. Shopify (SHOP:xnys) plunged 15.8% on revenue outlook missing estimates. Toast (TOST:xnys) dropped 22.8% after missing revenue miss. Twilio (TWLO:XNYS) jumped 14.3% on an earnings beat. Cisco (CSCO:xnas) climbed 5.2%.
Yields on the 10-year surged 6bps to 3.86% on a large jump on the PPI print in January and hawkish comments from Fed’s Mester and Bullard who brought a 50bp hike back to the table at the March FOMC. The selling during the session concentrated in the longer-end of the curve in particular in the 10-year futures contract and 5-year futures vs ultra-long bond contracts steepening trades. The USD9 billion TIPS auction had a bid/cover ratio of 2.38, below 2.69 last time. Traders are cautious ahead of next week’s USD120 billion supply from the 2, 5, and 7-year Treasury note auction.
Hang Seng Index rallied as much as 2.4% in the morning before spending the afternoon paring gains and finishing the Thursday session only 0.8% higher from the previous day. Qiushi Magazine, a mouth-piece of the Chinese Communist Party, published an excerpt of President Xi’s speech delivered in December, in which the Chinese leader highlighted insufficient aggregate demand as the paramount challenge so expanding consumption is a top policy priority. Media reports of foreign hedge fund building long positions in Chinese equities added fuel to the positive sentiment. The news that President Xi will be visiting Iran, a foe country with the United States, and China’s Ministry of Commerce imposed fines and sanctions on U.S. defence companies, Lockheed Martin (LMI:xnys) and Raytheon Technologies (RTX:xnys) dented sentiment.
Tech stocks outperformed with Hang Seng Tech Index gaining 1.8%. Online pharm platform shares surged on the news that the Chinese healthcare regulator is stepping up insurance coverage for drugs. JD Health surged 5.3%; Alibaba Health climbed 3.5%. Lenovo (00992:xhkg) jumped 6.7% ahead of reporting quarterly results. Chinese developers and property management services names gained. China Resources Mixc Lifestyle (01298:xhkg) rose 4.7%; China Overseas Land & Investment (00688:xhkg) gained 3.1%; Longfor (00960:xhkg) climbed 2.8%.
In A-shares, CSI300 advanced as much as 1% in the morning but pared all the gains to close 0.7% lower. Semiconductor, non-ferrous metal, machinery, and defense names led the charge lower. The food and beverage and cloud-computing gaming space bucked the decline and outperformed.
...as per our Quarterly Outlook. Albemarle, the world's biggest lithium company – in size, and scale (selling lithium to most EV makers) rose 4.7% after it delivered a stronger than expected sales outlook – with China’s reopening to provide extra momentum as demand for EVs picks up. It sees net sales growing to $11.3-$12.9 billion, and EBITDA getting as high as $5.1 billion. It expects to maintain positive cashflow even despite increasing capital expenditure. In Q4 - its earnings (EBITDA) swelled to $1.24 billion, beating expectations and marking a mega jump from $229 million (same time last year), as lithium earnings rose more than expected. Adjusted EPS also grew more than consensus expected with EPS, at $8.62. This paves a positive path for what we might expect from Allkem and Pilbara when they report results next week. Click here for Saxo’s lithium equity basket for stock inspiration.
Tesla shares fell 5.7% to $202.04, staying around seven-month highs. Although Tesla’s uptrend seems intact - buying is slowing - with the relative strength index (RSI) indicating we could see some consolidation here as the stock is in overbought territory. Tesla’s recall affects 362,758 vehicles, including certain Model 3, Model X, Model Y and Model S units manufactured between 2016 and 2023. Although Musk said it’s not a recall, even though Tesla’s full-self driving beta system “may allow the vehicle to act unsafe around intersections”, and increase collision risk if the driver does not intervene, Musk affirmed the issue will be remedies with a software update, by April 15.
RBA Governor Lowe today hinted that despite Australian unemployment rising to 3.7% in January up from 3.5% - it does not change its hiking guidance. Yesterday, he faced a Senate estimates hearing – saying the cash rate was unlikely at its peak. And today he is back on the podium, saying banks need to do better jobs of passing on rate hikes. Meanwhile Bullock said refinances of mortgages are really high, with consumers shopping around to get better deals. Amid diminishing corporate operational expenditure power - the unemployment rate will likely pick up this year, in the face of rising inflation and unemployment, meaning Australia faces a staglationary environment. We will continue to watch the AUDUSD and the GBPAUD – as we think the UK BOE could sit on its hands with rate hikes, while the RBA will likley push ahead with hikes in the coming months.
With US yields maintaining their upward trajectory, the dollar was firmer again on to reach fresh highs since 6 January. Hot PPI, still low jobless claims and Fed speakers opening the door to another potential 50bps rate hike underpinned. Quiet day ahead with no tier 1 data due and only Fed’s Barkin and Bowman speaking. USDCAD rose to 1.3480 amid weakness in oil prices while AUDUSD was flattish as metals prices recovered, despite a weak jobs data yesterday and RBA’s Lowe affirming more rate hikes. USDJPY rose to 134.50 overnight but was back closer to 134 in Asia. EURUSD continues to find support at 1.0650 as ECB speakers continued to highlight another 50bps rate hike at the March meeting.
Even as some signs of improving Chinese demand started to appear, the broader inflation and interest rate rhetoric nudging higher again this week weighed on crude oil and the commodity complex more broadly this week. A hot PPI overnight, along with Fed members now starting to open the door for another potential 50bps rate hike has further brought the Fed’s terminal rate pricing higher and US yields continue to rise. WTI prices dipped below $78 in Asia, with Brent around $85. Even as OPEC and IEA reports suggested possible uptick in demand as China reopens, US stockpile reports continued to dampen the demand outlook. Saudi Energy Minister Prince Abdulaziz bin Salman also said the current OPEC+ deal on output levels will remain in place until year-end and that he is wary of forecasts of much higher demand from China.
Copper prices rose higher on Thursday as the dollar rally took a bit of a breather before resuming again. Copper stockpiles on the Shanghai Futures Exchange fell for the first time in two months, suggesting that the Chinese demand is picking up. Growth in aluminium inventories also slowed, according to data from Shanghai Metals Market. This comes amid ongoing risks of further supply disruptions. Earlier this week, Freeport-McMoRan Inc suspended operations at its Grasberg copper mine in Indonesia due to landslides. This is adding to disruption to Peru’s output caused by social unrest. Copper prices rose to $4.15 before a retreat to $4.11 in Asia. The key $4 handle support continues to hold up.
Hawkish Fed speak prompted an upward shift in the Fed funds futures pricing for the terminal rate, but there is still more than one full 25bps rate cut priced in for this year. Loretta Mester said she saw a compelling case for a 50bp hike at the January FOMC meeting. A similar message was sent out by James Bullard too. However, both are non-voters although Mester may become a voting member this year if Austin Goolsby is appointed as Fed Vice Chair.
Mester also added that she is not ready to say if the Fed requires a bigger rate rise at the March FOMC; said more upside inflation surprises could make Fed policy more aggressive and can accelerate the pace if conditions warrant it. Bullard also reaffirmed his terminal rate projection of 5.25-5.50%. With members still sounding the hawkish alarm despite the market pricing catching up with the December dot plot, it appears to be a signal that the March dot plot may see an upward revision.
After the CPI report this week brought back concerns on the pace at which inflation is cooling, January PPI also saw a hotter than expected print. Headline rose 0.7% MoM or 6.0% YoY (vs. 0.4% MoM and 5.4% YoY exp) jumping from the prior month's -0.2% MoM print (revised up from -0.5%) but cooling from 6.5% YoY last month. Both goods and services prices increased, with goods rising 1.2% and services rising 0.4%. This has started to question the goods disinflation narrative and continues to support the thesis that services inflation is sticky. Price pressures were broad with ex food and energy measure also up 0.5% MoM from 0.3% last month and expected.
Initial jobless claims data was beneath expectations, and still beneath the watched 200k level, printing 194k against an expected 200k – still supporting the case for a tight labor market persisting. Continued claims were in line with expectations at 1.696mln, picking up from the prior 1.68mln.
The Reserve Bank of Australia chief Philip Lowe appeared for the second session of his testimony to the economic committee today, and the message emphasized that the RBA still needs to do more to bring inflation under control, despite acknowledging the impact on community. He said that business conditions remain above average and labor market is still strong. He was scrutinized not just on policy but also on transparency, especially after his closed door meetings with private bankers but lack of public address.
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