Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Key points
Equities: Quiet start to week, Japanese equities in focus, Q1 earnings start, and Tesla under pressure
FX: The dollar softens despite economic data strength
Commodities: Crude oil pulls back, FOMO drives gold to fresh record
Fixed Income: Bonds sell off as markets rethink rate cuts.
Economic data: Next key focus being US inflation data on Wednesday
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Equities: Flat equity futures in the US and Europe in early trading hours while Asian equities are generally higher with Japanese equities up 0.9% as the JPY weakens on key economic outlook survey indicating Japan’s lost momentum in March. This could derail the market’s thinking on BOJ and keep the Japanese equity market rally intact in the short run. The key event in equities is the start of the Q1 earnings with Friday being the most important day with earnings from Tesla CEO Elon Musk revealed Friday on social media that the company will unveil its robotaxi concept on 8 August lifting sentiment in Tesla shares. Given Elon Musk’s prior ability to meet deadlines we remain very skeptical about whether the robotaxi will have any meaningful impact on earnings over the coming years.
FX: The reaction of the FX markets to the hot US jobs report was short-lived, as the dollar’s jump to 104.70 was erased quickly. The dollar ended the week marginally lower despite hawkish Fedspeak, signaling that much of the hawkishness may have been priced in for now. NOK was the G10 outperformer for the week, as USDNOK slid below 10.8 on oil price gains. Sharp jump in Treasury yields however saw Japanese yen weakening again, and USDJPY remains in the intervention threat zone of 151.50+. USDCAD rose above resistance at 1.3615 to its YTD lows amid a soft Canadian jobs report where unemployment rate rose to 6.1% from 5.9% and is now back closer to 1.36 with BOC meeting eyed this week. EURUSD supported at 1.08 for now and GBPUSD stays above 1.26.
Commodities: Oil futures declined from a five-month high after Israel said it would remove some troops from Gaza, but despite signs of negotiations picking up, Middle East tensions remain a price supportive focus with Iran said to be preparing a response to recent attack in Syria. OPEC and IEA will release monthly oil market reports this week. Gold’s continued focus on momentum and FOMO (fear of missing out) saw it reach a fresh record above $2350 overnight before trading lower as the MidEast risk premium eased. Silver, up more than 12% this month, enjoys support from the industrial metal rally and its relative cheapness to gold. Arabica coffee broke solidly above $2 per pound on Friday, supported by Brazil crop concerns and record high Robusta prices.
Fixed income: Global bonds dropped on Friday, triggered by U.S. payrolls beating expectations. The German yield curve bear-steepened, while Italian BTPs underperformed peers, as market sentiment shifted to anticipate a less aggressive ECB rate-cutting cycle, should the Federal Reserve maintain a cautious stance. In the U.S., the yield curve bear-flattened, with yields climbing by 7 to 8 basis points across maturities as market projections adjusted, anticipating fewer rate cuts within the year, decreasing to 66 basis points from 71 basis points the previous day. By the day's close, two-year U.S. Treasury yields had reached 4.75%, and ten-year yields hit 4.4%, hitting their highest point since November. Comments from Federal Reserve officials Bowman and Logan weighed on markets, suggesting it might be premature to initiate rate cuts. Bowman specifically highlighted concerns that progress in reducing inflation could be faltering. Markets’ attention pivots to the U.S. CPI reading on Wednesday and to the ECB meeting on Thursday. A note of caution from Lagarde could imply that the ECB's decisions remain closely tied to the Fed's policy moves, as a weakened Euro could inadvertently fuel another inflation surge. Within this environment, we maintain a cautious stance and continue to favor bonds with a maturity of up to five years, while avoiding ultra-long issuances.
Macro: US jobs report (NFP) was hot once again. adding 303k jobs in March, above the 200k forecast, and 270k prior. The unemployment rate eased to 3.8% from 3.9%, despite expectations for it to be left unchanged while the labour force participation rate rose to 62.7% from 62.5%. While the report once again shows that the US economy remains resilient in the face of high interest rates, focus shifts to US CPI release this week which will be a bigger test of whether the recent inflation bump is a trend or not. Fedspeak (managing expectations on policy by central bankers) leaned hawkish with Bowman saying that it is not yet time for the US to consider cutting rates, while Barkin said the March NFP was very strong. Logan (non-voter) said it is too soon to think about cutting rates, given upside risks to inflation. Markets are now expecting less than three rate cuts this year and the odds of a July rate cut are lower at 91%. China’s PBOC announced that the central bank will provide RMB 500 billion in loans to banks at a preferential rate of 1.75%. These loans are intended for banks to extend 1-year credits to industries, supporting technological innovation and enhancing industrial capabilities. US Treasury Secretary Janet Yellen voiced concerns in Beijing about China exporting overcapacity in new energy vehicles and solar modules to the U.S. Expectations are for further contention between the two countries in these industries in the coming months, as trade and national security become focal points in the upcoming US presidential and congressional elections. For a more detailed analysis, please refer to our recent article.
Technical analysis highlights: S&P500 correction unfolding, key support at 5,057. Nasdaq 100 Correction unfolding, needs to close below 17,808 for confirmation. DAX top and reversal, correction likely to 17,900.
EURUSD likely resuming downtrend, above 1.0885 uptrend GBPUSD resuming downtrend support at 1.25, uptrend above 1.2685. USDJPY range bound 151.95 – 150.85. EURJPY if breaking above 164.9 uptrend likely resuming. AUDJPY failed to close above resistance. Gold reached 2,350 target, but despite uptrend quite stretched it is intact, could reach 2,400. Brent Crude oil above resist at 90.50, next 93.05, short-term minor correction unfolding, support at 82.56. US 10-year T-yield likely to test 4.50 resistance
Volatility: On Friday, the VIX saw a decrease to $16.03, shedding 1.96% off its previous day's spike, reflecting a slight relaxation in market volatility. The VVIX, however, edged higher by 0.60% to 90.58, while the SKEW index showed minimal change. This pause in volatility follows a week stirred by Federal Reserve officials' cautious remarks on future interest rate adjustments. Looking ahead, this week promises several key economic updates likely to influence market movements. Central focus will be on Wednesday's dual release of CPI data and FOMC Meeting Minutes, both of which are anticipated to drive significant market responses. Additionally, the week marks the onset of the new earnings season, spotlighting Friday's financial disclosures from JPMorgan, Wells Fargo, BlackRock, and Citigroup. The expected market movements for the coming week have notably increased, with the SPX projected to fluctuate by +/- 79.92 (+/- 1.54%) and the NDX by +/- 353.34 (+/- 1.95%), reflecting heightened volatility anticipation compared to the previous week.
VIX futures retracted slightly to 15.900, and futures for the S&P 500 and Nasdaq 100 showed marginal adjustments. Friday's top 10 traded stock options, in order: TSLA, NVDA, AMD, AMZN, META, AAPL, INTC, PLTR, MSFT and PFE.
In the news: Tesla scraps low-cost car plans amid fierce Chinese EV competition (Reuters), Toyota valuation doubles in new CEO's 1st year, nearing Tesla (Nikkei Asia), Israeli military says it reduces troops in south Gaza (Reuters), Yellen meets China's Premier Li amid 'tough conversations' on industry (Nikkei Asia), Dutch set to comply with U.S. demands that chipmaking giant ASML stop servicing some equipment it has sold to Chinese customers (Reuters).
Macro events (all times are GMT): German Industrial Output (Feb) exp. 0.5% & -6.8% vs 1% & -5.5% prior (0700), EZ Sentix Investor Confidence Index (Apr) exp –8.3 vs –10.5 prior (0930). Central Bank speakers: ECB’s Stournaras (1000), SNB’s Jordan (1615), Fed’s Goolsbee (1800)
Earnings events: The Q1 earnings season starts this week with Delta Air Lines on Wednesday and then major US banks on Friday. Delta Air Lines will give clues into consumer demand for leisure and business travel while banks will provide insights into credit growth and the overall economy.
Today: Industrivärden
Wednesday: Seven & I, EXOR, Delta Air Lines, Tesco
Thursday: Fast Retailing, Fastenal, Constellation Brands, CarMax
Friday: Progressive, Aeon, JPMorgan Chase, Wells Fargo, State Street, Citigroup, BlackRock
For all macro, earnings, and dividend events check Saxo’s calendar