Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Summary: U.S. equities rallied 1-2% on sequential declines in producer inflation in both headlines and core readings. Amazon rallied nearly 5% on its plans to invest in large language models and generative AI. China’s exports surged 14.8% Y/Y on US dollar terms, against a decline expected. On Friday, all eyes are on the Q1 results from JPMorgan Chase, Wells Fargo, and Citigroup from which investors may have a gauge of the latest development in the U.S. banking industry.
U.S. stocks surged on Thursday, with S&P 500 rising 1.3% and Nasdaq 100 jumped 2%. After a much softer-than-expected PPI report (see below), stocks climbed steadily throughout the session. Communication services, consumer discretionary, and information technology led the advance while real estate was the only losing sector within the S&P500 Index.
Amazon (AMZN:xnas) rallied 4.7% after upbeat comments on the eCommerce giant’s future on AI, in its annual letter to shareholders. Kicking off the Q1 earnings season, Delta Air Lines (DAL:xnys) shed 1.1% after reporting a loss in Q1 despite upbeat Q2 guidance.
According to FactSet, Wall Street analysts are expecting the S&P 500’s Q1 earnings to decline 7% Y/Y. Meanwhile, the latest CFTC data shows large speculative shorts in the S&P 500 futures ahead of the earnings season. Today, all eyes are on the results from JPMorgan Chase (JPM:xnys), Wells Fargo (WFC:xnys), and Citigroup (C:xnys). On top of earnings and capital ratios, investors will pay close attention to the deposit trend, interest rate margins, lending standards, provision for loan losses, write-down, and exposures to commercial real estate.
For the second in a row, yields dropped initially after cooler-than-expected inflation prints but it was followed by selling that pushed yields back up. On Thursday, the 2-year yield once fell to 3.89% soon after data showed the U.S. producer inflation, both the headline and the core measure, declined sequentially in March. Like a replay of the prior day, yields ticked up throughout the rest of the day and the 2-year yield finished 1bp higher at 3.97%. The longer-end underperformed, with the 10-year yield climbing 5bps to 3.44% and the 2-10-year yield curve steepened by 4bps to -52bps. A decent 30-year auction did little to help lessen the selling on the long end.
Yesterday Hang Seng Index gapped down at the open dragged by weaknesses in the technology space. The continuous divestiture from major shareholders in Tencent and Alibaba and downward earnings revision from analysts weighed on China internet stocks. At the open, the Hang Seng TECH index was down as much as 2.7% before spending the rest of the day clawing back losses and finishing Thursday only 0.2% lower. Alibaba (09988:xhkg) and JD.COM (09618:xhkg) dropped by around 2% while Tencent (00700) rebounded and closed 1.7% higher.
Hang Seng Index, with the help of the surge in pharmaceutical names, managed to reverse the fall and close 0.2% higher. Wuxi Biologics (02269:xhkg) up 7.8%, Hansoh Pharmaceutical (03692:xhkg) up 3.4%, and Sino Biopharmaceutical (01177:xhkg) up 3.4% were the top three gainers within the Hang Seng Index. Semiconductor leader, SMIC (00981:xhg) shed 3.3%.
In A-shares, CSI300 declined 0.7%. Semiconductor and telecommunications stocks were among the top losers. Pharmaceutical, tourism, retailing, and beauty-care stocks gained.
Australia’s benchmark index, the S&P/ASX 200 Index looks set to close higher for the third week in a row, and holds above its key moving averages (the 50, 100 and 200 day moving averages), which suggests sentiment has made a recovery from early march, and the Aussie share market could likely head to higher ground over the medium term. This has not only been supported by the RBA keeping rates steady, but also by China’s recovering gaining pace with credit rising more than expected. On top of that, bets are on that the Federal Reserve is nearing the end of its most aggressive rate-hike cycle in decades and this supports buying of Australian tech stocks, which are closely tied to the US, given that's where the majority of thier growth is from.
The most gains this week have been in materials, with Nickel Industries up 16% as at Thursday, with large institutional buying taking place, while the Nickel price has also moved up off its low, so that’s supporting Nickel Industries shares. Sandfire Resources shares are also considerably higher this week, up 10%, also on the back of institutional buying picking up, given its copper exposure is one of the largest in Australia, behind Oz Minerals.
It's worth keeping your eye on mining companies because Western Australia was hit by the strongest cyclone in more than 10 years, with the storm closing a key iron ore export port and forcing a gold mine 248 miles inland to wind down operations. The iron ore price has risen for the first time in three days and trades at $116.75. It is trading about 11% lower from its cycle high, and suffered the drop after China announced it was going to cut steel production for the third year in a row, in a bid to curb emissions. BHP, Rio, Fortescue and Champion Iron have seen chopping trading since late March as a result. However, could shut downs of ports persist, the iron ore price and iron ore miners shares would likely be supported higher, amid supply being taken out of the market.
The USD remained just short of touching the YTD lows after a soft US PPI provided relief that CPI could not. Still, minimal changes were seen to Fed expectations and Treasury yields actually ended the day higher. As long as the goldilocks expectations of cooling inflation and modest growth continues, there will be little in the path of dollar going lower. AUDUSD led the gains to touch 0.68 on improved China relations and strong employment report. NZDUSD also broke above 0.63 handle along with many other G10 FX crossing key levels such as EURUSD above 1.10 and GBPUSD above 1.25. ECB hawkish chorus continues to grow and call for a 25bps rate hike at the next meeting. USDJPY touched lows of 132 but could not sustain the move due to yield pressure returning.
Even as the goldilocks expectations of cooling inflation and modest growth continued, and USD was lower, crude oil prices pared some of the recent gains as technical levels were being tested. China’s robust trade data out on Thursday continues to signal demand strength from Asia, but OPEC report suggested some concerns around summer demand as inflation and restrictive monetary policy underpins. Specifically, OPEC in its latest monthly report said that “commercial inventories have been building in recent months, and product balances are less tight than seen at the same time a year ago”. Still, OPEC kept the 2023 world oil demand growth forecast unchanged at 2.3mn barrels/day. WTI prices slid below $82.50, Brent was at lows of $86. Over the week the oil price is up 2%, and is powering through for its fourth weekly advance, which has been supported by a weaker US dollar, and improving fundamentals after OPEC+ cut supplies.
Gold prices surged further on Thursday to fresh highs of $2048.74, bringing the key $2050 level in focus as expectations for a Fed pause remain intact after the softness in US PPI reported overnight and signs of a cooling jobs market. Silver followed as well to rise to highs of $25.97 as well, with critical test of the $26 ahead.
The March PPI data came in cooler than expected on the headline M/M and Y/Y, with M/M seeing a 0.5% decline. Core M/M was also cooler than expected, falling 0.1%, vs. expectations of +0.3%. While data suggested disinflation trends maybe more pronounced than what was evident from the CPI report earlier in the week, but February prints were revised higher for both the headline and core, suggesting it may be too early to put inflation fears behind. Meanwhile, initial jobless claims increased 11k last week to 239k, coming in above expectations to signal cooling labor market. However, May pricing for the Fed rate hike dropped only marginally to 69% from 71% ahead of the release. With only one rate hike and about 200bps rate cuts priced in for the current cycle, the risk/reward remains tilted towards a hawkish shift in expectations.
Australian employment rose more than expected showing the economy is more resilient than the RBA envisaged. Not only did employment rise beyond analyst estimates, but the unemployment rate remained steady at 3.5%. This validates that Australia’s central Bank could potentially surprise next month and get back to a hiking rate cycle. Given 53k jobs were added in March, versus the 20k rise Bloomberg consensus expected, it shows that not as many businesses are experiencing financial stress, as the RBA previously alluded to. Yesterday’s data, coupled with stronger than expected Chinese credit, also means the AUD against the US (AUDUSD) could potentially head back toward the 0.70 mark, particularly following the softer than expected US inflationary print. The next major catalyst for the AUD will be next week’s Q1 CPI.
China’s exports grew 14.8% Y/Y in USD terms, much stronger than the Bloomberg consensus of a decline of 7.1%. Growth of exports to ASEAN countries surged to 35.4% Y/Y. As some of the manufacturing capacities have been moved from China to ASEAN countries, it is likely that these countries are importing more intermediate and capital goods from China. Imports also came in stronger in March, with a slower decline of 1.4% Y/Y vs -6.4% expected.
Singapore’s Q1 GDP growth came in softer than expected at -0.7% sa QoQ from +0.1% in the fourth quarter. Meanwhile, Monetary Authority of Singapore kept the policy settings unchanged after five rounds of tightening moves. While recession was not mentioned, MAS said that risks to growth were tilted to the downside. On inflation, the central bank said the core inflation is expected to ease materially by end 2023 while still noting that fresh shocks to global commodity prices could impart additional inflation pressures but they may be balanced by a sharper-than-expected downturn in advanced economies. USDSGD rallied sharply in immediate reaction, but scope for strength in SGD remains as prior tightening moves have put the S$NEER band on an appreciating path.
Uniqlo owner Fast Retailing reported H1 (September-February) earnings yesterday, with revenues falling short of estimates but a profit beat and improved outlook helped stock open strongly on Friday. Revenue for the period increased 20% YoY to 1.47 trillion yen while net income rose 4% to 153 billion yen. The outlook was especially strong as easing of restrictions in Japan and also China’s reopening is likely to underpin. It now expects full-year revenue of 2.68 trillion yen ($20 billion), up 16% from the previous year’s result and compared to 2.65 trillion yen forecasted in January. Japanese equities are gaining a lot of interest as a diversification opportunity for investors especially after recent interest from Berkshire Hathaway.
In its annual letter to shareholders, CEO Andy Jassy pointed to an upbeat future on its Amazon Web Services and said the eCommerce giant is investing in large language models (LLM) and generative artificial intelligence and these two technologies “are going to be a big deal for customers, our shareholders, and Amazon.
JPMorgan Chase, Wells Fargo, and Citigroup are reporting Q1 results today. Saxo’s Head of Equity Strategy, Peter Garnry expects, as detailed in his latest article, that major US banks to have benefitted from the crisis on the funding side as their size and the systemically important financial institution (SIFI) label have provided them with safe-haven inflows of deposits while smaller banks are likely to show pressure on the funding side. He also expects the outlook to be mixed with US banks highlighting the resiliency of households and corporates but also acknowledging rising funding costs and tighter lending standards leading to lower loan growth and earnings growth over the next year. The 12-month forward EPS growth in the S&P 500 banks index is -0.6%.
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