Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Summary: The buy everything rally, led by US heavy weight stocks, was questioned in Asia today after the rally in US equities and bonds faded on Friday amid a pushback to Powell pivot from some Fed members including Williams. PMIs also continued to highlight a divergence in US and Eurozone economies, pushing the euro lower. Swap traders trimmed their 2024 rate cut expectations to five from six while ECB members warned the market about getting ahead of themselves in betting on policy easing. Focus now turning to Tuesday’s Bank of Japan meeting and whether the world’s last negative-rate regime will continue. Specs cut bullish oil bets to an 11-year low ahead of FOMC leaving it exposed to short covering.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Equities: The new week is starting with fresh negative sentiment in Asia with Hang Seng futures down 1.2% dragging down European equity futures with STOXX 50 futures down 0.3% in early trading hours. Today’s key macro events are IFO survey (0900 GMT) in Germany expected to improve from November and later NAHB Housing Market Index (1500 GMT) also expected to improve from November. Later this week we will get key earnings releases from FedEx and Nike which will provide a glimpse into global logistics demand and consumer confidence in consumder discretionary items. Tomorrow’s rate decision at the BoJ is also a key event should the central bank hint of future changes to its monetary policy that surprises the market.
FX: Another down-week for the US dollar as Fed Chair Powell adopted a dovish tone but other major central banks such as ECB and BOE stuck a relatively hawkish tone, although trends reversed slightly on Friday amid some pushback from Fed officials. A surprise rate hike from Norges Bank pushed NOK to be the outperformer on the G10 board last week. USDNOK moved below 10.50 for the first time in four months. BOJ comes next, and USDJPY traded flat around 142 with risk of a pushback on hawkish expectations likely to threaten a move back towards 145. EURUSD returned to 1.09 levels after failing at the 1.10 resistance and 200DMA at 1.0830 may be a key test, watch German Ifo due for a release today. GBPUSD was also back at sub-1.27 levels although AUDUSD held on the 0.67 handle and RBA minutes due tomorrow in Asia will be on the radar.
Commodities: Powell’s pivot towards rate cuts helped a struggling commodity sector end last week with gains, led by the industrial metals sector with palladium being the highflyer, up 24% on the week. Ahead of last week's FOMC meeting the net long position across 24 major commodity futures collapsed by 46% to a three-year low at 274k with net short positions being held in nine, and potentially exposing several knocked down commodities to strong rebounds should the technical and/or fundamental outlook change. An example being the energy sector where the hedge fund long in WTI and Brent has slumped to an 11-year low, with short covering being supported by Red Sea jitters. Gold also pared some gains on Friday but ended the week higher and continues to hold up above $2k begging the question whether a Santa rally could come. Copper remains in focus amid supply concerns and China easing property curbs, and China’s LPR announcement will be key this week.
Fixed income: The 2-year Treasury yield rose 6bps to 4.44% on Friday after Fed officials pushed back on discussion of imminent rate cuts, before drifting a bit lower today in Asia. However, yields at the long end of the curve continued to decline, with the 10-year yield falling 1bp to 3.91% and the 30-year yield down 3bps to 4.01%.
Macro: Fed’s Williams pushed back on the Powell pivot by saying that "we aren't really talking about rate cuts right now”, a clear divergence from Powell’s comment at the FOMC press conference last week when he said that the committee had discussed rate cuts. Later in the day, Fed's Bostic also came out considerably less dovish, suggesting just two rate-cuts in 2024, and likely after Q3. Fed's Goolsbee was dovish, but also less so than the market and the dots, saying that he expects rates to be lower next year than they are right now, but not significantly. Probability of a Q1 rate cut decline from 90% to less than 80%. US flash PMIs for December showed that the economy picked up some momentum as looser financial conditions helped to boost demand, business activity and employment in the services sector. The improvement in services PMI to 51.3 from 50.8 previously offset the increasing weakness in manufacturing with its PMI coming in lower at 48.2 from 49.4. Composite PMI therefore increased slightly to 51.0 from 50.7. Eurozone PMIs however escalated recession concerns. The composite flash PMI fell by 0.6pt to 47.0 in December with the manufacturing falling (by 0.5pt) to 44.1, and the services activity index falling (by 0.7pt) to 48.1. UK growth momentum however continued to pick up, particularly with services PMI expanding to 52.7 from 50.9 even as manufacturing cooled to 46.4 from 47.2.
Technical analysis highlights: S&P 500 forming top and reversal, expect minor correction but uptrend intact. Nasdaq 100 short term correction likely. DAX top and reversal pattern, support at 16,528 and 16,060. EURUSD rejected at key resistance at 1.10, a break above likely move to 1.1130. USDJPY still closing above support at 141.55, a close below potential to 138 otherwise expect rebound. GBPUSD above key resistance at 1.2745. potential to 1.29. Gold potential to 2,070. WTI Crude oil rebound likely, resist at 72.65, Brent testing resist at 77.25. Copper resuming uptrend. 10-year T-yields below support at 3.95 next 3.83
In the news: Former PBOC advisor says China should trim its holdings of US Treasury bonds (Bloomberg). Bankruptcies are rising as refinancing and higher interest rates are biting (FT).
Macro events (all times are GMT): Germany IFO (Dec) est. 87.7 vs 87.3 prior (0900), NAHB Housing Market Index (Dec) est. 37 vs 34 prior (1500)
Earnings events: Today’s key earnings release is HEICO (US aft-mkt) reporting FY23 Q4 (ending 31 October) with analysts expecting revenue growth of 45% y/y and EPS of $0.67 down 5% compared to a year ago.
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