Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
APAC Research
Summary: This week, investors will have a light data flow to work with, which will put the focus on tier 2 indicators such as jobless claims and S&P PMIs to assess the path of the Federal Reserve. However, the bigger focus will be on the comments from a host of Fed speakers in the week ahead. Following solid results from JP Morgan Chase, Citigroup, and Wells Fargo, investors are eager to get a gauge of the stress on smaller banks from the regional banks scheduled to report this week. Attention also turns to earnings from Tesla and Netflix due this week. Meanwhile, China's March economic activity data is expected to show an acceleration in growth, partly due to the base effect following strict lockdowns that began in major cities in March last year and a strong rebound in services activities. According to Bloomberg Survey, China's Q1 real GDP growth is expected to recover to 3.9% year-on-year.
The market remains tilted towards expecting another rate hike from the Fed at the May meeting with about 80% probability, but pause thereafter and start cutting rates in H2. We still think inflation hasn’t cooled enough to put it on a backburner, and continue to beg the question on whether Fed can really cut rates this year. With banking concerns also cooling somewhat in light of the improving commercial deposits and loans data from the US as well as a strong set of bank earnings to end the last week, focus again turns back to how much more the Fed needs to do to tackle inflation. A light data flow from the US this week will put the focus on tier 2 indicators like jobless claims and S&P PMIs to assess the path of Fed from here, but bigger focus will be on comments from a host of Fed speakers in the week ahead. Goolsbee (dove) and Williams (hawk) will be on the wires early on Thursday morning, while Mester, Bowman, Bostic and Harker take the stage on Friday.
China's March economic activity data is expected to show an acceleration in growth, partly attributable to the base effect following strict lockdowns that began in major cities in March last year. According to a Bloomberg survey, the median forecast expects a notable rise in retail sales growth to 8.0% Y/Y in March, up from 3.5% in the prior two months. The favorable base effect and a boost from services are expected to contribute to this growth. Additionally, surveyed consensus on industrial production anticipates an acceleration in growth to 4.7% Y/Y in March, compared to 2.4% in January and February. The same survey forecasts fixed asset investment to grow by 5.8% year-to-date, slightly higher than the 5.5% in the first two months of the year. Furthermore, economists surveyed by Bloomberg anticipate China's Q1 real GDP growth to recover to 3.9% Y/Y, up from 2.9% Y/Y in Q4.
Flash PMIs are due for April in the week ahead, and will be a key test of how economic momentum is shaping up. In the Eurozone, services PMI is expected to soften but remain in expansion territory and may get a further boost as China activity levels start to show a further pick-up in travel demand. Manufacturing PMI may also show some positive spill-over from the Chinese reopening. If PMIs continue to signal that eurozone can avoid a recession, that may provide a further bump higher to EURUSD. Before the PMIs on Friday, final Eurozone inflation print is out on Wednesday and ECB minutes will be parsed on Thursday to get a sense of how much more tightening is still in the pipeline. Markets are still pricing in a further 65bps of rate hikes from the ECB until September and EURUSD reached a new 12-month high above the key 1.10 handle last week. Technically, the next objective is perhaps the 1.1275 area, which is the 61.8% retracement of the entire rally off the down-wave from the post-pandemic highs to the sub-0.9600 lows last year.
In Australia, further signs of economic resilience could likely be released this week with Westpac’s Leading Index to likely show a pickup in activity, following last week’s stronger than expected jobs growth. Business confidence and services and manufacturing pulse checks are also on watch too. However, arguably, the RBA meeting minutes will be the most telling, and dissected on Tuesday for clues the RBA can keep rates on hold. That said, given the RBA is data driven, next week’s inflationary read, will have more weight.
On Thursday New Zealand’s quarterly CPI data release will likely show a further softening of inflation pressures, with inflation expected to fall to 6.7% YoY (Bloomberg Consensus estimate), marking a fall from the prior 7.2% read. While the quarterly read is expected to show CPI fell to 1.3% (Bloomberg Consensus estimate), marking a fall from the prior 1.4% print. If this eventuates, it would be a smaller inflation read than the RBNZ expects, of 1.8% YoY, and could cause the RBNZ to revise its hawkish stance when it decides on rates on May 24. Our thinking is that there is a risk of a 25bp hike in May, with the RBNZ to possibly pause hikes after that, given the country is grappling with the impacts of severe weather.
Japan’s inflation print will be on watch this week as expectations of a policy tweak from new Bank of Japan governor continue despite his tone of policy continuity. Bloomberg consensus expects headline CPI to come in at 3.2% YoY from 3.3% YoY in February but the core-core measure (excluding fresh food and energy) is still expected to be firmer at 3.6% YoY from 3.5% previously. Tokyo CPI data for the month reported previously showed a modest softening in headline inflation but the core-core measure unexpectedly rose higher. Japanese equities have recently gained a lot of interest because of the Warren Buffet’s investments, and a softer CPI may provide a further boost.
May hike from the Bank of England still remains in play with about a 77% probability, but commentary from officials has remained mixed. While economic momentum continues to pick up compared to recession calls being made late last year, this week’s data will be a key test for how much room there might be for further tightening. Labor data out on Tuesday and traders will be looking for signs on whether wage growth has peaked. CPI on Wednesday is expected to cool from double-digit levels seen in February, and services inflation will be the key component to watch as overall headline cooling can be driven by lower energy prices that remain volatile. Bloomberg consensus expectation is for headline inflation to come in at 9.8% YoY from 10.4% YoY previously. Lastly, retail sales and PMI data will be out on Friday, and a further test on whether the positive news on the economic momentum since the start of the year can continue. If not, the recent rally in GBPUSD to over 1.25 levels may be at risk of a reversal.
Regional banks in the US will be under close watch this week following the solid Q1 results from mega-cap banks JPMorgan, Citigroup, and Wells Fargo. These larger banks have benefitted from deposits flights from smaller banks, and investors are now eager to gauge the performance of the regional banks and their assessment of the business outlook. Over Q1, US domestic banks’ deposits fell 2.76% (not seasonally adjusted) or 2.35% (seasonally adjusted). M&T is scheduled to report on Monday, followed by Citizens Financial and Zion on Wednesday. On Thursday, Comerica, Fifth Third, Huntington, KeyCorp, and Sunovus will report, and Regions Financial will report on Friday.
Monday 17 April
Charles Schwab, M&T, Eve Energy, Exor
Tuesday 18 April
Bank of America, Goldman Sachs, Netflix, Johnson & Johnson, United Airlines, Lockheed Martin, Intuitive Surigical, Ericsson
Wednesday 19 April
Tesla, Morgan Stanley, US Bancorp, Zions,Citizens Financial, IBM, Alcoa, Abbott Lab, Lam Research, Las Vegas Sands, Metro, ASML, Heineken
Thursday 20 April
Blackstone, American Express, Comerica, Fifth Third, Huntington, KeyCorp, Sunovus, AT&T, Union Pacific, CSX, Philip Morris, DR Horton, CATL, Tryg, Nokia, Sartorius
Friday 21 April
Procter & Gamble, Regions Financial, Schlumberger, Freeport-McMoRan, Jinko Solar, SAP, Sandvik, Investor
Monday 17 April
Tuesday 18 April
Wednesday 19 April
Thursday 20 April
Friday 21 April