Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Summary: US and EU equity futures trade steady following a quiet, but generally upbeat Friday session on Wall Street, supported by a fresh drop in US Treasury yields after a surprise decline in US producer prices reinforced bets the Fed will lower interest rates, perhaps as soon as March. With the US cash equity and bond markets closed today for a holiday, Asian markets traded mixed with the Nikkei continuing higher while the Chinese Yuan strengthened after the PBoC held a key rate unchanged but still pumped more cash into the financial system. Brent crude trades back below $80 as the geopolitical risk premium ebb and flow while gold finds support from rising rate cut expectations.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Equities: The S&P 500 Index and the Nasdaq 100 index closed a tad higher on Friday just shy of their all-time highs after lower-than-expected US producer prices gave rate cut expectations a fresh boost. Energy stocks were the best performers as crude oil prices climbed. Airlines got hammered after Delta Air Lines cut the year’s guidance, blaming geopolitical tension, supply chain issues and energy prices. Bank shares mostly declined, with the KBW Bank Index falling by 1.1%. Wells Fargo plunged 3.3% after reporting higher loan loss provision and warned about net interest income trend in 2024. JPMorgan said lower interest rates this year would impact net interest income. Bank of America and JP Morgan Chase dropped by 1.1% and 0.7% respectively after reporting results below consensus forecasts. The US market is closed today for Martin L King holiday.
FX: Dollar was choppy on Friday with Yemen strikes adding some support before sharply lower 2-year Treasury yields helped send the Greenback lower to end the week broadly unchanged. The week has started with a small loss with broad but small gains continuing after Friday’s soft PPI print. The Japanese yen was stronger as yields fell, but USDJPY remains pinned around the 145 mark while the EURUSD continues to find sellers ahead of 1.10. EURNOK also pushed lower amid the moves in oil and geopolitical concerns, printing lows of 11.25, and December lows of 11.18 remain in focus. USDTWD rose to its highest levels in three weeks following the election results, while the yuan strengthened as China stayed away from a widely expected MLF rate cut.
Commodities: In crude oil, the ongoing battle between soft fundamentals and Middle East risks continue with Brent trading lower after failing to gain a foothold above $80 on Friday. For now, the market sees a low risk of the conflict spreading to endanger crude production and flows from key producers in the Middle East. Having recently cut their long gold exposure by 23%, speculators got back in on the buying action on Friday as 2-year yields slumped amid an 80% expectation for a March rate. Copper trades a tad firmer with China stimulus speculation the focus. US key crop futures, led by corn, slumped on Friday with the Bloomberg Grains index hitting a fresh 3-year low after a US report showed robust supplies and sluggish US demand.
Fixed income: Yields fell across the curve on Friday, led by a 10bps drop in the 2-year yield to 4.14% after components in the PPI report that were input to the PCE compilation showed weakness. Traders positioned for downside surprises in the December PCE data that may bring the 3-month and 6-month annualized rates of PCE inflation below the Fed’s 2% target next week. The 10-year yield fell 3bps to 3.94%. The 2-10-year yield curve steepened by 7bps to 21bps. Today, US bond markets are closed due to Martin L. King Day. Thus, the focus turns to Wednesday when retail sales, industrial production and the import price index will be released. Wednesday's 20-year US Treasury bond auction will be an important focus as it will serve as a barometer of demand for duration.
Macro: US December PPI came in softer-than-expected. Headline PPI declined 0.1% MoM, despite expectations for a 0.1% gain, matching the prior month's decline. YoY was also cooler than expected at 1% (exp. 1.3%), but up from the revised down 0.8% for Nov. The core measure was also cooler than expected and was unchanged M/M, matching the prior read despite expectations for a 0.2% gain, while the Y/Y rose 1.8%, beneath the 1.9% forecast and 2.0% prior. That has led to Fed rate cut pricing picking up further for 2024, with a total of 165bps of rate cuts priced in now vs. 155bps earlier. China PBoC, defying market expectations, kept its key 1-year lending rate unchanged at 2.5% while injecting 216b yuan of liquidity into the financial system.
Volatility: As the market gears up for a busy earnings week, volatility signals mixed sentiment. The VIX edged up to $12.70, with the VVIX and SKEW index both posting notable gains, suggesting a rise in risk awareness among investors. The VIX1D also indicated heightened short-term volatility, reinforcing the cautious stance in the market. With U.S. markets closed today for Martin Luther King Jr. Day, investors are poised for the forthcoming financial sector earnings, which could inject significant movement. The expected moves for the SPX and NDX this week are finely balanced, with the market pricing in an anticipated move of about 0.91% and 1.13% respectively.
Technical analysis highlights: S&P 500 testing previous peak, eyeing 4,835 possibly higher, support at 4,682. Nasdaq 100 resuming uptrend likely to reach 17K, support 16,166. DAX struggling for upside momentum, support at 16,470. EURUSD range bound 1.0882 – 1.10. USDJPY above key resistance at 144.95 likely to test resist at 146.60 and 147.50. EURJPY uptrend, reached 0.618 retracement at 160.04, possible move to 161.90, support at 158.55. Gold range bound 2,017- 2,065. Crude oil broke above falling trendline but failing to follow through and is sliding back. 10-year Treasury yields testing 3.90%, break below could lead to 3.80 but likely bounce to 4.00
In the news: Microsoft edges out Apple as world's most valuable company (Reuters), Citi to cut 20,000 jobs, posts $1.8 billion loss in 'disappointing' quarter (Reuters), Panasonic to Make Upgraded Electric Car Battery as Early as 2024 (Bloomberg), Chinese carmaker BYD held talks with lithium producer in Brazil (FT), Ukraine promotes peace plan at Davos meeting for 83 countries (FT)
Macro events (all times are GMT): Eurozone industrial production (Nov) exp. -0.3% & -0.6% vs –0.7% & -6.6% prior (0900). No US data due Martin L King Holiday.
Earnings events: No major US earnings today
For all macro, earnings, and dividend events check Saxo’s calendar
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