Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Key points:
Equities:Sentiment is lower on strong economic data extending timing of rate cuts
Currencies: Broad dollar strength led by gains against Asian currencies
Commodities: Agriculture gains offsetting losses across metals
Fixed Income:Markets continue to push back on their expectations for rate cuts this year.
Economic data: Uni of Michigan sentiment
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Equities: May preliminary PMI figures in both the US and Europe surprised positively yesterday confirming that the economy is accelerating despite what central banks believe are restrictive policy rates. Recent data points have once again pushed back interest rate cuts increasing the stakes for the ECB ahead of their rate decision next month. Equities are trading lower on the back on these developments with Japanese equities down 1.3% in Asia and European equity futures are 0.7% lower with both markets catching up to the lower sentiment yesterday in US equities. It was an unusual session yesterday with almost all stocks in the S&P 500 falling except for Nvidia up 9.3% following a stronger than expected demand outlook for AI chips.
FX: The Bloomberg Dollar index sees broad gains on the week on a combination of the FOMCs higher-for-longer message and robust US economic data, with the strongest gains seen against the Asian currencies of AUD, KRW and JPY while GBP trades near unchanged after the CPI miss helped delay rate cut expectations.
Commodities: The Bloomberg Commodity Index is heading for a small weekly loss with profit taking across precious and industrial metals being partly offset by gains across the agriculture sector. Gold suffering a USD 125 correction and heading for its worst week in three months, after stronger-than-expected US economic data lowered rate expectations this year to just one by December. Silver trades down on the week but holding above key support at USD 30 while copper has stabilised following its premature surge and subsequent correction towards key support in the USD 4.70 to USD 4.75 area. EU gas, up 15% on the week, hit a year high on Thursday at EUR 36.23 following an unplanned outage in Norway as ongoing concerns about the remaining supplies from Russia. Crude oil prices continue to drift lower, trading near a three-month low amid signs of demand weakness. OPEC+ meets next Saturday and a rollover of current production cuts remains the most likely outcome. Strong week across the agriculture sector with production worries supporting wheat, cotton and coffee.
Fixed income: Strong U.S. PMI data led to a bear-flattening of yield curves on both sides of the Atlantic as markets revised their expectations for interest rate cuts this year. Federal Reserve Bank of Atlanta President Raphael Bostic reinforced the sentiment of maintaining higher interest rates for an extended period, aligning with statements from his colleagues. The bond futures market now predicts only 33 basis points in rate cuts this year, with the timeline for the initial reduction shifting from November to December. On the day, U.S. 10-year yields softened slightly by 5 basis points, settling around 4.47%, after peaking just below 4.50%. Prior to the US PMI release, the ECB reported a 4.7% wage increase in the first quarter, suggesting persistent underlying inflationary pressures. However, policymakers appear poised to begin cutting rates starting in June. ECB’s Villeroy indicated that a rate cut in June is probable, and policymakers remain confident about the progress of disinflation. Despite these discussions, bond futures markets adjusted their expectations, anticipating less aggressive rate cuts with only an 87% chance of a rate cut in June, down from 97% earlier in the week. Swap markets also adjusted their expectations for rate cuts by the end of the year to 59 basis points, down from 64 basis points just the day before. In the UK, retails sales declined -2.7% in April, much more than. Although the data might suggest a more dovish BOE, it comes together with higher-than-forecasted inflation data making a June cut unlikely. However, bond markets might increase chances for a rate cut in August. Today, ECB’s Schnabel, Vasle, Muller, Nagel, De Cos and Centeno, and the Fed’s Waller are speaking.
Technical analysis highlights: Top and reversal pattern in US Indices, correction in the cards: S&P500 support at 5,194. Nasdaq 100 support at 18,464, but could drop to 18,170. DAX uptrend potential to 19K . EURUSD rejected at resistance at 1.0885, correction likely to 1.0782. GBPUSD back below strong resistance at 1.2710 but uptrend intact but fragile, maybe false break, possible correction to 1.26. USDJPY uptrend potential to 158.45. EURJPY reached 170, could experience minor setback before higher. USDCAD resumed bullish trend, upside to 1.3850. EURCHF eyeing 1.00. Gold correction support at 2,314, likely rebounding. Silver correction testing 0.382 retracement at 30, likely rebound. Copper correction to 475 likely over, expect rebound. US 10-year T-yield bouncing from 4.30 key support. Resist at 4.53
Volatility: A volatile day on the markets yesterday ended with the VIX closing at $12.77 (+0.48 | +3.91%). The market reacted negatively to the PMI numbers, pushing volatility up to 13.37 intraday and causing a market reversal. As the US heads into a long weekend, trading volume is expected to be lower than usual, which could lead to increased volatility despite the absence of significant news or earnings events today. This morning, VIX futures are at 13.85 (-0.005 | -0.04%), while S&P 500 and Nasdaq 100 futures are at 5292.25 (+7.00 | +0.13%) and 18711.00 (+14.75 | +0.07%) respectively. Yesterday's top 10 most traded stock options, in order: Nvidia, Tesla, Advanced Micro Devices, Apple, Amazon, AMC Entertainment, Alibaba, Intel, Taiwan Semiconductor Manufacturing, and Meta Platforms.
Macro: US business activity accelerated in early May at the fastest pace in two years, largely reflecting stronger growth at service providers and accompanied by a pickup in inflation. The May Composite PMI rose by more than 3 points to 54.4, the highest since April 2022, topping all estimates, led by an increase in services to 54.8 from 51.3 while the manufacturing component reached 50.9 against 50 expected. The Solactive Global Shipping Index covering everything from containers, LNG, bulk, tankers, to cars transportation trades at an all-time high. Highlighting robust global activity and the challenges faced by central banks in getting inflation down. A global container shipping index has surged by 50% in the past three weeks, reaching the highest-level level since 2022 amid strong gains on all the major China to EU and US routes.
In the news: Stock futures are little changed after Dow posts worst session since March (CNBC), A New Trade War Offers No Easy Way Back for Old Global Order (Bloomberg), Gold eyes biggest weekly drop in nearly eight months (Reuters)
Macro events: UK retail sales (Apr) exp –0.3% YoY vs 0.8% prior, US Durable goods orders (Apr) exp –0.8% vs 2.6% prior, Uni of Mich Sentiment (May) exp 67.7 vs 67.4 prior, Weekly COT reports from ICE Europe and CFTC (2000)
Earnings events: Focus is on Autodesk reporting FY25 Q1 (ending 30 April) earnings with analysts expecting revenue growth of 10% YoY and EPS $1.74 up 137% YoY.
Today: Autodesk, Dollar Tree
For all macro, earnings, and dividend events check Saxo’s calendar
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