Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Chief China Strategist
Summary: US PPI surged beyond expectations, rising 0.6% M/M or 1.6% Y/Y in February. Core PPI, increased by 0.3% M/M and 2.0% Y/Y, exceeding forecasts of 0.2% and 1.9%, respectively. This prompted investors to reconsider the Fed's rate cut pace, leading to a 10bps jump in the 10-year Treasury yield to 4.29%. The S&P 500 and Nasdaq 100 both retreated by 0.3%, with Tesla and Nvidia dropping by 4.1% and 3.2%, respectively. Meanwhile, the BOJ is reportedly preparing to end its zero interest rate policy next week, pending confirmation based on spring wage negotiation results.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
US Equities: A surge in bond yields, driven by a PPI report that exceeded expectations, caused stocks to face downward pressure, leading to both the S&P 500 and Nasdaq 100 declining by 0.3%. Within the Magnificent Seven, performance varied: Alphabet and Microsoft saw gains of approximately 2.4%, while Apple and Amazon experienced increases of over 1%. Conversely, Tesla and Nvidia dropped by 4.1% and 3.2%, respectively.
Microsoft announced the global availability of its AI chatbot Copilot for Security, starting April 1, applying a consumption-based pricing model. In extended-hours trading, Adobe dropped by 11%, despite reporting slightly better-than-expected quarterly revenue of $5.18 billion and EPS of $4.48. The sell-off was triggered by downbeat guidance for the current quarter, which disappointed investors.
Hong Kong/China Equities: The Hang Seng Index retreated from recent highs, declining by 0.7% to 16,962. This drop was particularly pronounced for WuXi-AppTec, WuXi Biologics, and WuXi XDC, which plummeted by 12.1%, 13.1%, and 18.02% respectively. The decline followed the announcement by the Biotechnology Innovation Organization (BIO) in the U.S., stating its intention to take “steps to reaffirm the organization’s position with regards to national security and the role that the industry plays as a vital strategic asset.” The steps include the removal of WuXi-AppTec’s BIO membership. This, together with the passage of the TikTok bill by the House, reminds investors that the U.S. has extended its scope of restrictions against Chinese companies for national security reasons beyond semiconductors to many more areas. On the mainland, the CSI300 slid 0.3%, with media, electronics, and defence sectors dropping, while non-ferrous metal and energy stocks gained ground.
Fixed income: Hot PPI data caused investors to rethink the pace of the Fed rate cuts this year and the potential adjustments to the FOMC’s rates and inflation estimates in its quarterly summary of economic projections or dot plot. The probability implied in interest rate futures for a rate cut by June fell to 54.5% from 58.2% a day ago. The 10-year Treasury yield jumped 10bps to 4.29% while the 2-year yield added 6bps to 4.69%.
FX: The US dollar rallied as Treasury yields surged. EURUSD dropped to 1.0880 and USDJPY climbed to 148.50. Despite the anticipation of a BOJ pivot that ends the zero interest rate in Japan, yen strength remains uncertain without a more hawkish BOJ stance and is largely dominated by the strength of the dollar which has recently picked up amid investors expecting a slower pace of rate cuts by the Fed. For further insights, refer to Charu Chanana's article.
Commodities: WTI crude and Brent crude oil front-month futures rose 1.9% and 1.7% respectively on Thursday, reaching $81.26 and $85.42. This surge followed the International Energy Agency (IEA) revising its global oil demand forecast upwards to 1.7 million barrels a day (mbd) for Q1 and 1.3 mbd for the entire year of 2024, up from its earlier projection of 1.2 mbd.
Macro:
Macro events: US Empire State Survey (Mar), Industrial Production (Feb), U of Michigan Consumer Sentiment (Mar), Japan spring wage negotiations (Shunto) aggregate results from the Japanese Trade Union Confederation (Rengo).
Earnings: Contemporary Amperex Technology, Vonovia, Jabil
In the news:
For all macro, earnings, and dividend events check Saxo’s calendar.
For a global look at markets – go to Inspiration
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