Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Summary: Markets are in a holding pattern yesterday as we await US CPI tomorrow. The Nasdaq 100 Index posted its highest close since last August, while Chinese equities remain on the comeback trail even as China reported slowing exports and a plunge in imports. The US dollar clawed back higher after its recent bout of weakness. A US credit survey shows tightening lending standards and weak credit demand.
Narrow trading range session yesterday in US equities with S&P 500 futures increasing slightly from Fridays close but still firm inside the trading range of 4,072 to 4,189 that has been in place since late March. The equity market is clearly in a wait-and-see mode until tomorrow’s US inflation figures and with the earnings calendar being light today, we expect little action unless we get some idiosyncratic news and risks out of the US regional banks industry. The VIX Index closed yesterday below 17 reflecting a very relaxed equity options market.
In anticipation of more widespread increases in the regulated retail prices for residential used natural gas in China, share prices of residential gas suppliers rose, with Hong Kong and China Gas (00003:xhkg) and China Resources Gas (01193:xhkg) surging over 5%. Other top gainers included China brokerage names, led by CICC which soared nearly 10%. Weakness in semiconductors, healthcare, and sportswear weighed on the benchmark index. Hang Sent Index shed 0.5% in the early Asian afternoon. In A-shares, CSI300 added 0.4%, with brokerage names among the best performers.
USDJPY popped higher overnight as Bank of Japan Governor Ueda answered questions in parliament USDJPY rose from 135 to 135.30 before retreating later back below 135.00 even as his comments were nothing new, saying that the scheduled review won't have any pre-set idea in mind on specific monetary policy moves. He also said that BOJ will take necessary policy action at each meeting, with an eye on financial and price developments, even while conducting the review – a repeat of what was hinted at the April BOJ meeting. Earlier, Japan’s March labor data signalled that easy monetary policy could continue. EURUSD remains within the orbit of the 1.1000 figure, and has not traded above 1.1100 or below 1.0900 since April 11. The US CPI data tomorrow possibly an important catalyst.
Crude oil traded higher again on Monday before easing back as technical resistance got in the way of further gains. Overall, demand concerns have somewhat eased with China’s increased travel demand over the Golden Week holiday underpinning sentiment, while supply concerns were raised due to the wildfires in Alberta which halted at least 145kb/d of oil production. WTI traded lower overnight after finding resistance at $73.58 and Brent at $77.47, the 50% and 38.2% retracement respectively of the post OPEC+ cut slump. Key levels to break to send a signal of strength, thereby forcing additional short covering. Today the EIA will publish its Short-term Energy Outlook (STEO) while US CPI tomorrow may provide further market signals.
Following Friday’s correction, courtesy of a strong US jobs report, gold has settled into a relative tight $2020-30 range as traders await the US CPI report on Wednesday. An important report that may add to the debate on whether the FOMC is likely to keep hiking or, as the market expect, will turn to cutting rates later this year. The SOFR futures market is currently pricing in a 75 bps cut before yearend followed by another 1.4% next year. Gold’s current resilience, apart from support from a softer dollar and yields, can also be seen through continued and firm demand for gold exposure through futures and ETFs. Support at $2007 followed the $1986.
US yields extended a bit higher yesterday, but eased back slightly lower overnight, still very much embedded in the range that the market has established since the March bank turmoil and awaiting a 3-year Treasury Auction today (10-year and 30-year auction follow tomorrow and Thursday). US 10-year benchmark at 3.49% and 2-year at 3.98%.
China reported 8.5% growth in exports in April, a growth number that was flattered by Year-on-year comparisons due to Shanghai lockdowns last year, but still stronger than expectations. The bigger news was the 7.9% drop in imports versus expectations for nearly flat growth. The overall trade surplus for the month was $90 billion.
The U.S. labor market remains very strong. Yesterday, the Conference Board Employment Trends Index was released. In April, the index was up to 116.2 versus 115.5 in March. The index is usually considered as a leading indicator for employment. It is based on eight labor-market indicators such as Job Openings, the industrial production, or the ratio of involuntarily part-time to all part-time workers. When the index increases, which is the case for the month of April, it suggests that employment is likely to keep growing in the short-term. So far, the situation of the U.S. job market is not consistent with an imminent risk of a recession.
The Federal Reserve released the April 2023 Senior Loan Officer Opinion Survey on Bank Lending Practices, which showed that credit standards tightened further, and credit demand tumbled in the first quarter to levels not seen since 2009. Lending standards tightened across commercial and industrial sectors, both for large/middle market firms (up to 46% from 44.8% in Q4) as well as for small firms (46.7% from 43.8%), and more so for households except government sponsored enterprises. More banks charged borrowers with widened loan spreads over the cost of funds (62% for large/mid-sized firms vs 45% prior; 58% for small firms vs 33% prior). Meanwhile, demand was weak across all sectors, also including commercial real estate as high interest rates bite. Comments on question suggested that banks expect to tighten standards further across all categories.
The impasse over the US debt ceiling continues to threaten further pressure on the US financial markets this week. President Biden is scheduled to meet with Congressional leaders today to discuss raising the current USD 31.4tn limit, with Congress typically tying approval of a higher debt ceiling to budget and spending measures. Treasury Secretary Janet Yellen has warned that there are “no good options” for solving the debt limit stalemate other than Congress lifting the cap.
Further concerns on credit tightening or delays in debt ceiling solution could continue to drive up short-term Treasury yields, potentially in 3months, as investors hedge against a possible default. The yield on a T-bill maturing at the end of this month is ~4.5%, but there’s a 60-90 basis-point premium for bills maturing in June and July, reflecting the tension in markets. Our Senior Fixed Income Strategist Althea Spinozzi explains what T-bills are and how to get exposure in this article.
KKR reported a 26% decline in Q1 earnings as fees dropped 9% y/y and asset sales slowed down as a function of higher interest rates over the past year. Uncalled commitments declined 7% y/y suggesting investor inflows cannot keep up with investments across the firm’s portfolio. Shares were down 4% in yesterday’s session. PayPal beat on Q1 revenue and earnings, and even raised the fiscal year guidance, but despite of this a lower operating margin guidance soured the mood among investors. PayPal shares were down 6% in extended trading.
Wage data remains a key focus in Japan with BoJ’s new governor Ueda having hinted at his first policy meeting that he will be watching next year’s wage negotiation to be convinced that price pressures in Japan are wage driven. March wage data released this morning however showed that nominal wage growth softened to 0.8% YoY and February’s figure was also revised lower to 0.8% from 1.1% previously. Real wage growth remains in negative territory, coming in firm at -2.9% YoY. Household spending also came in below expectations, sliding into negative territory at -1.9% YoY from +1.6% previously, suggesting weakening private consumption may continue to support the case for easy monetary policies.
The outlook for a strong production year recently drove the Bloomberg Grains index to a 15-month low last week before bouncing, and speculators responded by shifting to a net short position for the first time since August 2020. In the week to May 2 all six grains and soy contracts saw net selling led by corn and soybeans. One current focus are the weekly planting progress reports, released on Mondays by the USDA and in the latest they said that 35% of US soybeans were planted as of May 7, the second fastest pace on record. Corn was 49% planted, ahead of the 5-year average at 42% and last year's 21%. Wheat meanwhile was only 24% complete, well below the 5-year average at 38%.
China’s exports in USD terms rose 8.5% Y/Y in April, above the expected 8.0% but decelerated from 14.8% the prior month. The biggest surprise was the plunge of imports by 7.9% in USD terms, much worse than the 0.2% decline expected and raising concerns about the lack of strength of the economic recovery.
The next macro calendar event risk of note is tomorrow’s US April CPI release, with the consensus expectations looking for +0.4%/5.0% for the headline and +0.3%/+5.5% for the core, Ex Food and Energy, reading. The low core YoY reading for the cycle was the 5.4% registered back in February. Markets continue to price that the Fed is finished with its tightening cycle and will cut as soon as September (with low odds even of a July FOMC meeting rate cut), and the next two to three months of inflation and employment-related economic data will be crucial for the outlook for yields.
Today’s US earnings focus is Airbnb which is expected to report Q1 earnings after the US market close with analysts expecting revenue of $1.79bn up 19% y/y and EBITDA of $259mn compared to $37mn a year ago. Travel stocks continue to be among the strongest segments in the global equity market as activity is rebounding from last year’s muted travel season due to pandemic restrictions. Recent comments from Mastercard are suggesting that travel activity remains resilient in Q2, so we expect Airbnb to remain positive on the outlook. Read our earnings preview for this week’s earnings from Airbnb, DIsney, and Richemont here.
0730 – Sweden Riksbank Minutes
0800 – ECB’s Chief Economist Lane to speak
1000 – US Apr. NFIB Small Business Optimism
1200 – Mexico Apr. CPI
1230 – US Fed’s Jefferson (Voter) to speak
1600 – EIA's Short-term Energy Outlook
1605 – US Fed’s Williams (Voter) to speak
1700 – US 3-year Treasury Auction
2030 – API's Weekly Crude and Fuel Stock Report
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)