Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Summary: US bond yields dropped and equities surged as the US Core PCE ticked down to 4.6%. Headline inflation in the Eurozone came in softer than expected at 6.9% while the core measure was in line at 5.7%. The S&P 500 gained 1.4% led by consumer discretionary. China PMI data suggest continuous economic recovery and strength in the services sector. Nine members of the OPEC+ surprised the market with a joint voluntary production cut on Sunday, see May WTI crude more than 6% higher at USD80.50.
The S&P advanced 1.4% and Nasdaq 100 jumped 1.7%. Nasdaq 100, soaring 20%, had its best quarter since 2001. Stock prices opened strongly following the PCE inflation surprising the softer side. In the S&P 500, all 11 sectors advanced, led by consumer discretionary, real estate, and communications. Financials were laggards within the S&P 500, up only 1.2%. The KBW Bank Index climbed 0.9% on Friday but was down 25% for the month of March, massively underperforming S&P 500’s 3.5% gain and Nasdaq 100’s 9.5% increases over the month.
Tesla (TSLA:xhks), surging 6.2% on Friday, was the second-best-performing stock within the S&P 500. Micron (MU:xnas) dropped by 4.4% after China announced to launch of a cybersecurity review into the company’s memory chips sold in China and was the worst performer in the S&P 500.
On Friday, the Stoxx 600 index gained 0.6% after EU inflation consumer price rises slowed, and the Fed’s preferred inflation print came in lower than expected, paving the way for less aggressive rate hikes. over the quarter the benchmark Euro index rose 7.1%, with defence names surging and offset bank sector woes. Euro zone headline inflation cooled down to 6.9% in March, while core inflation taking out energy and food, rose from 5.6% to 5.7%. The European Central Bank (ECB) previously suggested it will continue to rise interest rate as necessary to slow inflation. The ECB hiked by 50 basis points in March. Further data releases through the morning showed a drop in German retail sales; while the U.K. economy recorded 0.1% growth in the fourth quarter of 2022, revised up from a first estimate showing no growth.
The softer-than-expected PCE Deflator prints triggered yields on Treasuries to start falling. Yields continued to grind lower throughout the Friday New York session with the largest fall in yield at the belly of the curve. The 5-year yield dropped 11bps to 3.57% which the 2-year yield coming down by 9bps to 4.03% and the 10-year yield falling 8bps to 3.47%.
Hang Seng Index advanced 0.5% and CSI 300 climbed 0.3% on Friday. China’s March Manufacturing PMI came in better than expected and the non-manufacturing PMI surged strongly.
JD.COM (09618:xhkg) jumped 5.4% as the e-commerce giant filed for listings of subsidiaries Jingdong Property and Jingdong Industrial on the Stock Exchange of Hong Kong. Alibaba (09988:xhkg) gained 3.6% as the group is preparing to get its logistic unit, Cainiao Network Technology listed in Hong Kong.
Macao casino operators surged, led by MGM China (02282:xhkg) up 6.2%, and Melco (00200:xhkg) up 4.8%. In the China consumer space, Xiabuxiabu Catering (00520:xhkg) surged 5.3%. Shenzhou (02313:xhkg) gained 6.6% on analyst lifting target price.
Media, computing, and telco names as well as AI generative content concept stores led the advance in A-shares.
The ASX200 rallied to its highest level since March 3, after rising for the 6th session, as the market prices in the RBA is likely to hold rates at tomorrow’s central bank meeting. Australia sees lithium exports continuing to surge and are expected to match thermal coal's importance within five years. AU coal shipments are expected to drop 71% over the period. Meanwhile, total mineral lithium exports are set for a record A$464 billion ($310 billion) in the year through June. In other AU news Australia has selected Lockheed Martin for its satellite communication system.
Rounding out the quarter, one of the most traded currencies was the Euro against the USD, which rose 2.1% in Q1, with the European Central Bank’s prior hike outpacing the US Fed’s with the swaps indicating there is only a 50:50 chance the Fed will hike at its next meeting.
The WTI crude oil price gaped up, breaking over $80 after rising 6% when OPEC+ unexpectedly cut crude production by more than 1 million barrels a day, and abandoned previous assurances that it would hold supply steady. Meanwhile Saudi made its own 500,000 barrels a day supply reduction, with Kuwait and UAE and Algeria following suit. And Russia said the production cut it was implementing from March to June would continue until the end of the 2023.
The gold price trades 2% under last weeks record hitting a lower low for the second session in a row, with the next major catalyst being this weeks US jobs report. That said, some gold equites are trading at record, with the gold price remaining in record high territory in AUD.
U.S. Personal Consumption Expenditure (PCE) deflators, both headline, and core, came in softer than expected. February headline PCE inflation grew 0.3% M/M (consensus 0.3%, prior 0.6%) and 5.0% Y/Y (consensus 5.1%, prior 5.4%). The Fed’s preferred inflation gauge, Core PCE deflator, was 0.3% M/M and 4.6% Y/Y in February, softer than both consensus (0.4% M/M, 4.7% Y/Y) and January (0.6% M/M, 4.7% Y/Y). The Core Service ex-Shelter inflation decelerated to 0.27% M/M in February from 0.49% M/M (revised down from the previously reported 0.58%) in January but rose to 4.63% Y/Y from 4.55% Y/Y the prior month.
According to the survey by Bloomberg, analysts are expecting the March ISM Manufacturing Index to slip to 47.5, further into the contraction territory, from 47.7 in February. In addition to the headline, the focus will be on employment, new orders, and price-paid components.
Headline CPI in the Eurozone came in at 6.9% Y/Y in March, falling from 8.5% Y/Y in February and below 7.1% expected. The Core CPI ticked up to 5.7% Y/Y in March from 5.6% Y/Y in February, in line with expectations.
China’s March Manufacturing PMI came in at 51.9, moderating from the prior month but better than expectations. The biggest positive surprise came at the Non-manufacturing PMI print, which surged to 58.2 in March from 56.3 in February while economists estimated a decline. The Services sub-index increased, by 1.3 points to 56.9, signaling strong momentum in demand for in-person services.
The Caixin China PMI Manufacturing is scheduled to release today and is expected to edge down to 51.4 from 51.6 but remain in the expansion territory.
Tesla (TSLA:xnas) announced on Sunday that the EV giant delivered 422,875 vehicles in Q1, setting a record. The deliveries in Q1 beat the 421,164 consensus estimate as per Bloomberg’s survey but missed the 432,000 estimate as per FactSet’s survey.
UBS will be cutting 20% and 30% of its workforce, in the wake of taking over Credit Suisse Group AG. As many as 11,000 employees will be laid off in Switzerland, and another 25,000 worldwide. However, reports suggest firms such as Deutsche Bank AG, Citigroup Inc. and JPMorgan Chase are gearing up to recruit some of the investment bankers and wealth managers likely to be let go.
According to a statement from the Brazilian Trade and Investment Promotion Agency, Banco BOCOM BBM, a Rio-based subsidiary of China’s state-owned Bank of Communications will be connected to China’s Cross-border Interbank Payment System (CIPS), an arrangement similar to SWIFT, to settle trade between China and Brazil in renminbi. Banco BOCOM BBM will be South America’s first direct participant in the CIPS. The new arrangement follows China and Brazil’s agreement to settle trade in their own currencies.
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