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.
Equities: US and European equities took a hit yesterday as the US March inflation report surprised to the upside highlighting the once again inconvenient truth that inflation is more entrenched than the market had priced due to excessive fiscal policies. Today’s key market event is ECB rate decision at 12:15 GMT and later US March PPI figures. The market is clearly expecting a June cut from the ECB so any language at the ECB press conference in the light of yesterday’s US inflation report leaning away from a June cut will upset European equities. Delta Air Lines shares were down 2.3% yesterday after starting higher following better than expected Q1 results and Q2 earnings outlook beating estimates. The changed pricing of lower probability of rate cuts is not good news for airliners.
FX: The dollar surged to near a five-month peak after a third consecutive monthly CPI beat with focus on PPI today as another strong print could send jitters about a hot PCE print for March. Dollar strength weighed the most on activity currencies, and losses in G10 were led by AUD and NOK despite another surge in oil prices. Japanese yen remains a key focus as USDJPY finally pierced through 152 and rose to fresh record highs of 153.24 and verbal intervention from Japanese authorities gathered momentum. The threat of an actual intervention remains limited ahead of US PPI today, and because yen weakness post-CPI has been primarily against the USD and not so evident on the crosses. EURUSD hit a trough of 1.0730 and ECB meeting is eyed today. USDCAD broke above resistance at 1.3625 and touched the 1.37 handle. In Asia, the PBOC yuan fixing came in lower than expectations, suggesting that the Chinese central bank is still trying to keep a firm hold on the yuan
Commodities: Geopolitical risks once again drove Brent back above $90 following reports of an imminent Iran attack on Israel despite a higher dollar post-CPI which together with a 5.8 million barrel rise in US crude stocks, more than double of the expected increase, had seen prices lower earlier in the day. Focus on OPECs monthly oil market report. Gold put up a strong defense against persistent price pressures that may further delay Fed interest rate cuts. However, the prospect for sticky inflation and geopolitical risks continue to offset the negative impact of dollar strength, rising yields and fewer rate cuts. Base metals meanwhile suffered amid the prospect of rates staying higher for longer, potentially hurting the economic growth and demand outlook. Grains trade steady ahead monthly US crop reports which will focus on ending stocks and SouthAm production levels.
Fixed income: Hotter-than-expected inflation data in the U.S. propelled sovereign bond yields higher worldwide as traders tempered their expectations for interest rate cuts this year. Currently, markets are pricing in 40 bp of rate cuts from the Federal Reserve, down from 60 bp just a day earlier. A disastrous 10-year US Treasury auction exacerbated the sell-off. The auction tailed by 3.1 bps, the most significant tail since December 2022, with primary dealers left holding 24% of the issue, the highest since November 2022. Consequently, the US yield curve bear-flattened, with 2-year yields closing 23 bps higher at 4.93%, and 10-year yields ending the day at 4.54%, up 19 bps. On the back of the US CPI report, German 10-year Bunds closed the day 6.4 bps higher at 2.43%, while Gilts underperformed their European peers, with 10-year yields climbing by 11.7 bps to 4.14%. Market expectations still anticipate a 20 bp rate cut by the ECB in June. Today, all eyes will be on the ECB meeting, particularly the press conference, as the growing divergence between the EU and the USA comes into focus. Click here to access our ECB preview.
Macro: US CPI came in hotter than expected for a third consecutive month in March. Headline was up 0.4% MoM (vs. 0.3% exp and 0.4% prev) and 3.5% YoY (vs. 3.4% exp and 3.2% prev). Core CPI also came in higher at 0.4% MoM (vs. 0.3% exp and 0.4% prior) and YoY measure unchanged at 3.8% despite expectations of a cooling to 3.7% YoY. Gains were broad-based across goods and services categories and the door for a June rate cut seems to have closed. Market now expects 20% odds of a rate cut by June and is pricing in less than 50bps of rate cuts for the year. FOMC minutes were stale, with most Fed members agreeing it would be prudent to begin slowing the pace of balance sheet runoff soon. Bank of Canada held rates unchanged at the meeting yesterday and a dovish shift in language and comments from Governor Macklem was seen, opening the door to a June rate cut especially after the dismal jobs report seen last week. We discussed the BOC meeting in this article, and continue to expect hard landing risks for the Canadian economy to rise if BOC was to wait for the Fed to make the first rate cut. ECB Preview: While no change to interest rate is expected, the ECB is likely to lay the ground at the press conference for a rate cut in June. This could send European equities running higher as two-year Schatz yield drops towards 2.8% and EURUSD could test 1.07. China’s consumer prices were 0.1% higher YoY in March, lower than the 0.7% in February and below the 0.4% expected, underlining the challenges for the world’s second-largest economy as it tries to boost domestic demand.
Technical analysis highlights: S&P500 correction unfolding, key support at 5,057. Nasdaq 100 Correction unfolding, needs to close below 17,808 for confirmation. DAX top and reversal, correction likely to 17,900.
EURUSD resumed downtrend with potential to 1.07-1.0660 GBPUSD downtrend with potential to 1.2410, support at 1.25. USDJPY broken above resist at 151.95 upside to 156.38. USDCHF above resist at 0.9108, no resist until 0.9245, EURJPY failed to reach previous peak at 165.35, could be caught range bound down to 163. AUDJPY collapse. Downtrend if below 99.19. AUDUSD rejected at 0.6640, likely to test 0.6485 support. Gold top and reversal pattern, correction likely unfolding to 2,281, maybe down to 2,230. Silver correction likely, possibly to 26.80. Copper top and reversal pattern, correction likely to 420-410. Cocoa new high could move to 11,000. Brent Crude oil uptrend, resist at 93.05, support at 82.56. US 10-year T-yield likely to move to 4.60-4.70
Volatility: No update today.
In the news: Fed looks to slice balance sheet runoff pace by half (Reuters), Biden and Kishida Enlist Amazon, Nvidia to Fund AI Research (Bloomberg), Meta debuts new generation of AI chip (Reuters), Delta expects summer travel demand to produce record second-quarter revenue (Reuters), Goldman Says It’s Time to Take Tech Profits and Invest Elsewhere (Bloomberg), Germany May Be Europe’s Achilles’ Heel in First-Quarter Earnings (Bloomberg), The ‘supercore’ inflation measure shows Fed may have a real problem on its hands (CNBC), Weak China inflation data fuels concern over consumer demand (FT)
Macro events (all times are GMT): ECB Rate Announcement (1215), OPEC’s MOMR (during the day), US PPI (Mar) exp final demand YoY at 2.2% vs 1.6% prior with ex food and energy at 2.3% vs 2% prior (1230), EIA’s weekly natural gas storage change, exp +11 bcf vs –37 bcf prior (1430), USDA’s World Agriculture Supply and Demand Estimates (1600)
Earnings events: Today’s earnings releases will not move markets, so instead we are looking ahead for tomorrow’s earnings from major US banks such as JPMorgan Chase, Wells Fargo, and Citigroup. With the recent change in markets on rate cuts (more market participants now believe there will be no cuts) these three banks will tomorrow most likely provide a positive outlook for their banking business.
For all macro, earnings, and dividend events check Saxo’s calendar