Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Summary: The rally in global bonds continued Wednesday with the 10-year US Treasury yield falling to 4.1%, its lowest since August, driven by weaker-than-expected ADP employment report, and a continued sharp decline in crude oil prices supporting a lower inflation outlook. The decline in crude oil pressured energy stocks and together with weakness in Nvidia and Amazon, the S&P 500 futures ended lower to challenge support in the 4550 area. Shares also fell across Asia overnight, driven by Wall Street losses and concerns about China’s fiscal health. The focus now shifts to Friday’s US jobs report after private payrolls showed weakness, thereby supporting a succession of rate cuts in 2024.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Equities: Sentiment in equities has soured a bit over the past 24 hours with Nikkei and Hang Seng futures down a little over 1% and equity futures in Europe and the US are slightly lower in early trading hours. One of the looming questions in the market is the decline in the oil price and what it means. Surely, it does not rhyme with economic expansion, but does the current levels rhyme on an incoming recession? This is not clear yet although economic data are suggesting a wider slowdown is happening. Today’s key earnings release is Lululemon Athletica reporting FY24 Q3 earnings tonight after the US market close. With recent upside surprises across many consumer companies, we would not be surprised to see Lululemon surprise to the upside on its outlook.
FX: A broad measure of dollar strength trades higher for a fourth day despite the sharp fall in the 10-year Treasury yield as yields in other G10 bonds declined as well. Losses this week have been led by NOK on plunging oil prices and AUD on continued China growth worries. Bucking the trend is USDJPY which is falling towards 146.50 down more than 0.5% today as Japan’s 10-year yield is at 0.75% rising more than 10 bps, and most since December 2022.
Commodities: The Bloomberg Commodity Index tumbled 2% on Wednesday, with losses seen across all sectors apart from precious metals, most notably the softs sector which saw sugar slump by 7.8% on improved outlook in India, while coffee was down 4.6% on profit taking following recent run up in prices. The energy sector remained under pressure amid concerns supply may exceed demand and scepticism over OPEC+ members’ resolve to deliver on promised production cuts. WTI crude oil tumbled 4.3% to $69.50, its lowest level since June with Brent trading below $75 and into an area that may raise the risk of an emergency OPEC+ meeting. Gold meanwhile continues to consolidate after finding support near $2009 earlier in the week.
Fixed income: The 10-year Treasury yield fell 6bps to 4.10%, marking the lowest level since August. This decline was attributed to a weaker-than-expected ADP employment report, a downward revision in Q3 unit labor costs, and a sharp drop in crude oil prices. Meanwhile, the 2-year yield ticked higher by 2bps to 4.59%, resulting in an 8bps flatter 2-10-year yield curve, now at -49. Job numbers continue to remain a focus today and tomorrow.
Macro: The US ADP employment report was softer than expected, with a job gain of 103k in November (consensus 130k) and a downward revision to 106k from the previously reported 113k in October. Job gains were mainly in trade and transportation industries and education and health services. Employment in manufacturing fell by 15k. US Q3 unit labor costs were revised down to a large decline of -1.2% Q/Q annualized from previously reported -0.8%. Nonfarm productivity was revised up to 5.2% Q/Q annualized from 4.7%. Bank of Canada, as the market expected, kept its target for the policy overnight rate unchanged at 5% and guidance little changed. Moody’s change outlooks on 22 Chinese local government financing vehicles (LFGVs), eight Chinese banks, 18 Chinese infrastructure SOEs, 15 other SOEs and three private enterprises, including Alibaba and Tencent, to negative from stable.
Volatility: The VIX ticked up to $12.97 yesterday (+0.12 | +0.93%), following the VVIX which rose 1.09 (+1.27%) to 86.85. More volatility is expected today with the release of the Initial Jobless Claims, which will be in focus. Volatility futures rose slightly overnight to 13.900 (+0.165 | +1.19%). S&P 500 and Nasdaq 100 futures stayed nearly flat: -2.50 (-0.05%) and -11.00 (-0.07%) respectively. With oil tumbling down (WTI crude oil tumbled 4.3% to $69.50), it’s volatility index (OVX) rose sharply to 39.72, up 3.36 (+9.24%).
Technical analysis highlights: S&P 500 correction unfolding support at4,58. Nasdaq 100 short term correction, support at 15,744 and 15,535. DAX record close, uptrend very stretched expect correction. EURUSD strong support 1.0760 and 1.07. USDJPY downtrend, strong at 145. GBPUSD rejected at 1.2745, support at 1.2545 & 1.2445. Gold likely to bounce from support at 2.009 to 2,057. WTI Crude oil support at 67. Brent support at 71.93. 10-year T-yields below support at 4.20 could drop to 4.07
In the news: BOJ's deputy governor highlights benefits of ending ultra-easy policy (Reuters), The Bank of England stepped up warnings about hedge funds shorting US Treasury futures, that suggests a jump in the so-called basis trade, which is where investors seek to exploit price differences between futures and bonds (Bloomberg), Nvidia’s CEO Still Plans to Sell High-End Chips in China (WSJ), Apple moves towards India-made iPhone batteries in push away from China (FT), Global Airlines Set for Record Revenue With Pandemic in Past (Bloomberg), ByteDance offers investors share buyback, valued at $268 bln-sources (Reuters).
Macro events (all times are GMT): Germany Industrial Production (Oct) exp –0.4% vs 0% prior (0800), Eurozone GDP (Q3) exp –0.1% vs –0.1% prior (0900), US Weekly Jobless Claims (1230), US Consumer Credit (Oct), EIA weekly natural gas storage change (1430)
Earnings events: Earnings releases today from DS Smith, Dollar General, Broadcom, Lululemon, Vail Resorts, DocuSign and RH. Our focus is on Lululemon because of its exposure to the US consumer. Analysts expect Lululemon to report revenue growth of 18% y/y and EBITDA of $502mn up from $432mn a year ago.
For all macro, earnings, and dividend events check Saxo’s calendar
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