Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Summary: Following Friday’s very strong US job report, the dollar and Treasury yields strengthened further after Fed Chair Powell on CBS’s 60 minutes program pushed back against March rate-cut expectations. Wall Street meanwhile reached another record close on Friday, led by Meta’s 20% rally and Amazon’s 8% jump, but with US equity futures pointing to a softer session in Europe. Asian markets broadly enjoyed the tailwind from Friday’s US gain with China and Hong Kong stocks advancing from earlier losses following another official statement about support to curb recent wild swings.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Equities: Flat start to the week in US and European equity futures. In Asia, Nikkei 225 futures are up 0.7% and on Sunday the China Securities Regulatory Commission said it would do more to stabilize the Chinese equities through technical measures of getting funds to flow into the market and clamp down on illegal activities. The week ahead will again be impacted by a busy earnings week with key earnings from McDonald’s, Toyota, Eli Lilly, AstraZeneca, L’Oreal, Hermes, and PepsiCo. The US strikes over the weekend on Iran-linked targets in the Middle East could evolve into a bigger risk depending on Iran’s response.
FX: The Dollar rose sharply in response to the Friday's blowout jobs report and Fed Chair Powell’s ’60 Minutes’ interview serving as a further pushback to March rate cut expectations. The DXY index rose to test the 104.20 resistance which is holding for now, but we see more catalysts for dollar strength as noted in our Weekly FX Chartbook. USDJPY rose to highs of 148.82, remaining just shy of the 149 handle with intervention risks on the rise again. For technical analysis on JPY pairs, see this article. EURUSD plunged to sub-1.08 again broke 100DMA support at 1.0784, and sterling bulls were also jolted as GBPUSD fell all the way to 1.26 from 1.2760+ after the less hawkish BOE last week. AUDUSD was one of the worst performers last week as RBA dovish bets picked up, and pair slipped to 0.65 handle from 0.66+ on Friday. RBA meeting tomorrow, and continued downbeat China rhetoric, could put focus on 76.4% fibo retracement level at 0.6412.
Commodities: Oil prices plunged again on Friday amid a stronger US dollar and fading hopes of a truce in the Israel-Hamas conflict. However, prices were firmer overnight with US forces launching attacks against the Houthis in Yemen and Houthis vowing to respond. Iron ore prices slid 3.6% before rebounding as Beijing prepares fresh measures to stop the market rout in equities. Gold and silver fell victim to the hot US job report and Fed Chair Powell pushing back against a March rate cut, now down to 20% with the number of cuts this year below 5 from above 6 a week ago. The uranium sector has been showing remarkable strength as the supply outlook continues to tighten, read our Commodity Weekly for more insights.
Fixed income: Treasury yields jumped sharply following the surprisingly large addition to the January non-farm payrolls and significant positive revisions to prior months as well. The increase in the 3-month moving average job creation to 289,000 from 165,000 caused traders to temper their bets on a March rate cut and anticipate the first cut coming in May. The 2-year yield surged 16bps to 4.36%, while the 10-year yield climbed 14bps to 4.02%. On Monday Asian morning, Powell said in a pre-recorded CBS 60 Minutes episode that it’s unlikely the first interest rate cut would come in March. Treasury yield rose further in Tokyo trading, with the 10-year yield reaching 4.08%. Bond markets’ attention shifts toward this week’s US Treasury auctions, where the auction size of the 10-year notes will be the largest on record, and the 30-year bonds the largest since November 2021. We expect strong bidding at the 10-year auction, however the performance of the 30-year bonds remains uncertain as demand will need to come from investors looking to extend their portfolio duration. A busy primary market might add to bearish sentiment as investment grade non-financials corporates are looking to sell between 25bn-30bn bonds this week.
Macro: US NFP jobs report showed 353k being added in January, well above 180k consensus. Net upward revision of over 100k for December and 400k for 2023. The underlying drivers also delivered a message of strength with private payrolls at 317k, against the expected 155k. The unemployment rate was unchanged at 3.7% despite expectations for a rise to 3.8%. Monthly earnings rose 0.6% (exp. 0.3%, prev. 0.4%), Y/Y earnings rose 4.5% (exp. 4.1%, prev. 4.4% - revised up from 4.1%). March rate cut probability is now down to less than 20%. Focus turns to ISM services, Fed’s SLOOS survey and Bostic’s comments due later in the day. The University of Michigan headline sentiment index for January was revised higher to 79.0 from 78.8, above the expected 78.9, while the conditions index was revised lower to 81.9 from 83.3 and the forward-looking expectations index was revised up to 77.1 from 75.9. On inflation expectations, 1yr ahead remained at 2.9% and the longer-term 5-10yr trend ticked higher to 2.9% from 2.8%.
Technical analysis highlights: S&P 500 cancelling correction, resuming uptrend likely to take out 5K. Nasdaq 100 minor correction, resuming uptrend. DAX rejected at 17K, needs to close above for upside, Likely correction to 16,500. EURUSD bouncing from 100 DMA, could dip to 1.0730 key support. USDJPY testing key resistance at 148-80, a close above looking at +150. EURJPY key support at 158.55. GBPUSD range bound 1.2610-1.2775. AUDUSD below key strong support at 0.6520. Gold rejected at strong resistance at 2,064 once again, if broken move to 2,121, key support at 2K. 10-year T-yields bouncing from previous low at 3.78, still below 200 DMA.
Volatility: The VIX remained steady on Friday, fluctuating between $13.70 and $14.20, and closing at $13.85. In contrast, the S&P 500 and Nasdaq 100 rallied, up 1.07% and 1.72%. This week's expected moves are slightly toned down to +/- 1.13% for the SPX and +/- 1.63% for the NDX, indicating a subtle shift in market volatility expectations. Despite reduced prospects of a March rate cut, markets are alert to further Fed communications. Earnings season continues, with significant company reports likely to influence market movements. Overnight, VIX futures nudged up 0.71% to $14.650, while S&P 500 and Nasdaq 100 futures saw minor pullbacks to 4970.75 and 176955.25, hinting at cautious trading as the market nears the critical 5000 mark. This milestone could heighten volatility, with investors balancing the potential for further advances against the risk of a retreat.
In the news: Fed Chair Jerome Powell shares why central bank hasn't yet cut interest rates, even as inflation falls (CBS 60 Minutes), US intends further strikes on Iran-backed groups, national security adviser says (Reuters), China Vows to Stabilize Markets After Rout, Offers No Detail (Bloomberg), Trump said he would impose more tariffs - possibly in excess of 60 per cent - on China if he is elected again (SCMP), Turkey's new central bank head plans tight monetary policy until inflation curbed (Reuters).
Macro events (all times are GMT): Eurozone Sentix investor confidence (Feb) exp –15 vs –15.8 prior (0830), Eurozone Producer Prices (Dec) exp. -0.8% & -10.5% vs –0.3% & -8.8% prior (0900), US S&P Services PMI (Jan, final) exp 52.9 vs 52.9 prior (1345), US ISM Services (Jan) exp 52 vs 50.6 prior (1400), US Senior Loan Officer Jan Opinion Survey (1800), Fed’s Goolsbee on Bloomberg TV (1400),
Earnings events: Another busy week ahead on earnings with the list below highlighting the largest companies reporting earnings this week.
For all macro, earnings, and dividend events check Saxo’s calendar