Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Summary: Equity futures in the US and Europe trade higher for a second day as robust earnings helped offset Tuesday’s CPI surprise. Gains in US stocks on Wednesday were once again led by a handful of large tech stocks while bond markets rebounded from the post-CPI selloff as Fed members downplayed the hot January CPI report while the dollar remains firm, especially against the yen after Japan slipped into a technical recession, which could question BOJ tightening hopes. Gold trades below $2k but with no follow-through selling seen while crude oil dropped after a US stockpile surge. Focus turns to comments from ECB’s Lagarde and Fed’s Waller in the day ahead.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Equities: A strong comeback to equities following the upside surprise on US January inflation with Nikkei 225 futures pushing above 38,000 again in today’s session. US and European equity futures are also pointing higher in early trading. We have seen some mixed earnings results this morning from French-based Schneider Electric and Airbus. In other European earnings this morning, Commerzbank says it has no material exposure to US commercial real estate and Stellantis announcing €3bn buybacks in FY24 says operating conditions for carmakers are tough as competitors are slashing prices to compete. Technology and health care stocks are still driving equity sentiment and while we are not negative on the outlook, we do want to remind investors that a pullback could come as valuations are getting stretched.
FX: The dollar hangs onto most of the post-CPI gains despite Fed speakers downplaying the hot inflation print. We see dollar gains becoming more durable as rate cuts for other central banks like BOE, ECB and SNB are brought forward while Fed rate cut expectations are delayed. GBP was the underperformer on Wednesday, sliding to a 1.2536 low, after a dovish UK CPI and comments from Gov Bailey. EURUSD bounced off the 1.07 support and was back at 1.0730 while USDJPY eased but remained above 150 as Japan’s Q4 GDP confirmed a recession. AUDUSD rallied back to 0.65 despite RBA’s Bullock sounding confident on inflation coming back to target, but a weaker than expected employment report brought the pair back to 0.6480.
Commodities: Gold remained stuck below $2010 support-turned-resistance, but with no follow-through selling seen so far while silver bounced after once again finding support at the important $22-level. Crude oil fell after the EIA reported a bumper 12m barrel jump in US crude stockpiles amid lower refinery demand and weak end a temporary reduction in end user demand for diesel and gasoline, related to recent weather woes in California. Corn futures fell to a fresh three-year low ahead of a USDA outlook forum which is likely to project the biggest domestic stockpile since 1987. US natural gas futures slumps to a four-year low on forecasts for much warmer weather. EIA’s weekly stock report today is expected to show a 66bcf drop, well below the five-year average at 149 bcf.
Fixed income: Treasuries unwound part of Tuesday’s sell-off amid a light economic calendar, following the move of UK Gilts, which rose on the back better-than-expected CPI estimates. This morning Gilts are likely to continue to drive in European and US sovereign bond performance as UK GDP data show the economy has contracted more than expected for a second consecutive quarter in a row. Yet, Waller’s speech and US retail sales, import price index, and initial job claims are going to be a focus for bond markets in the afternoon. Overall, we expect CPI to remain the main driver of bond markets as central banks try to secure a “soft landing.” Within this environment, see scope to extend duration up to 10-year tenors but remain wary of ultra-long duration (for more information click here).
Macro: Chicago Fed President Goolsbee (2025 voter, dove) said even if inflation comes in a bit higher over the next few months, it is still consistent with the Fed's path back to target. Goolsbee said he does not support waiting until inflation is already at 2% on a 12mth basis before cutting rates, and added cuts should be tied to confidence in being on a path towards the target rate. It is also being reported that Chair Powell told Congress in a closed-door meeting after the CPI report that the inflation data was "consistent with what they had been anticipating" and the Fed would look to the upcoming PCE report to give them more intel. UK January CPI came in below expectations. Headline was at 4.0% YoY vs. 4.1% expected, as services inflation was up 6.5% vs. BOE’s expectation of 6.6%. Core inflation held up at 5.1%, below the consensus forecast of 5.2%. BOEs Bailey gave testimony to the House of Lords, and he was tilted to the dovish side, saying that there are indications of pay growth deceleration. Japan’s economy slipped into a technical recession, with Q4 GDP coming in at -0.4% QoQ ann. vs. +1.1% expected. Q3 GDP growth was also revised lower to -3.3% QoQ from -2.9% earlier. This dire growth picture makes it even more difficult for the BOJ to tighten policy, as we have argued before.
Technical analysis highlights: S&P 500 uptrend stretched correction could be unfolding, support at 4,845. Nasdaq 100 correction could be unfolding key support at 17,128. DAX testing support at 16,821, a close below potential to 16,500. EURUSD downside potential to 1.0660. USDJPY uptrend potential to 152 but could be testing support at 149.75. USDCHF broken above 0.8820 resistance, likely testing 0.89. AUDUSD likely bearish move to 0.64. Gold below 2K, support at 1,973 and 1,931. 10-year T-yields double bottom pattern confirmed, strong resist at 4.38
Volatility: After Tuesday's spike in volatility, the VIX cooled to $14.38 (-1.47 | -9.27%), indicating a market stabilization. The VVIX and SKEW indices also saw declines, yet the SKEW index remains elevated at 160.40, hinting at continued market caution towards outlier events. The market showed resilience, with the S&P 500 and Nasdaq 100 rebounding by 0.96% and 1.18% respectively, and the S&P 500 notably closing just above the critical 5000 mark, suggesting a readiness to rebound from recent shocks. VIX futures further suggest easing volatility, currently at 15.000 (-0.140 | -0.92%). Futures for the S&P 500 and Nasdaq 100 also reflect a stable outlook, each up by 0.06%. In the options market, activity remained brisk, with the day's most actively traded stock options being TSLA, NVDA, AAPL, PLTR, AMD, HOOD, MARA, LYFT, UBER, and META
In the news: Uber hits record high after unveiling first-ever $7bn share buyback (Reuters), Lyft Shares Surge as Strong Earnings Report Offsets Typo Confusion (WSJ), Warren Buffett’s Berkshire Hathaway Trims Its Massive Stake in Apple (WSJ), Cisco to cut more than 4,000 jobs, lowers annual revenue forecast (Reuters), The Six Months That Short-Circuited the Electric-Vehicle Revolution (WSJ)
Macro events (all times are GMT): US Empire Manufacturing (Feb) exp. -12.5 vs -43.7 prior (1230), US Philadelphia Fed (Feb) exp -8.1 vs -10.6 prior (1230), US Retail Sales (Jan) exp -0.2% vs 0.6% prior (1230), US Industrial Production (Jan) exp 0.2% vs 0.1% prior (1315), US initial jobless claims, exp 220k vs 218k (1230), EIAs Natural Gas Storage Change, exp. -66bcf vs -169bcf 5-year avg (1430). Speakers: ECB’s Lagarde & Lane; BoE’s Green & Mann; Fed’s Waller & Atlanta Fed Bostic
Earnings events: Today’s key European earnings releases are Scheider Electric and Airbus. Schneider Electric is reporting mixed results with revenue disappointing slightly while operating margin and organic growth were better than expected. Schneider Electric is also saying that AI boom is causing demand lift in its data center business. Airbus is in line with estimates for Q4 but proposes a smaller than expected dividend for the fiscal year and the FY24 deliveries guidance is below the estimates. Today's US earnings focus is Applied Materials (aft-mkt) and Deere (bef-mkt).
For all macro, earnings, and dividend events check Saxo’s calendar
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