Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Summary: Equity markets charged higher in the US session to close at new record highs, and the upside extended further in the futures market overnight. In FX, the recent USD strength eased slightly, while oil prices are creeping back higher despite the recent fears of strategic reserve releases. Markets are nervously awaiting the announcement of who US President Biden will nominate to head the Fed after the current Powell term ends in February.
What is our trading focus?
Nasdaq 100 (USNAS100.I) and S&P 500 (US500.I) - US equities pushed to new all-time highs yesterday led by technology stocks and strong macro figures across manufacturing surveys and job market data such as jobless claims. Nasdaq 100 futures are trading around the 16,560 level in early European trading with the 16,500 being the intraday day support level. A recent survey among institutional investors shows that a majority is believing in the transitory inflation narrative which can help explain why investors in equities are looking through the latest inflation pressures.
EURUSD and EURGBP – the beleaguered euro finally bounced back a bit after its recent remarkable slide, although it is tough to see what could engineer a reversal of the move below the 1.1500 level, which is the key chart resistance now, although Biden announcing Brainard as his pick to head the Fed next February could drive considerable short-term volatility. To stop the euro from a persistent slide, we would need a very different tone from the ECB than it has delivered recently, with no real opportunity to do so until the December 16 ECB meeting. With power prices and a new Covid wave weighing on the outlook, the ECB will very likely be happy to stay firmly dovish.
USDJPY – the highs for the cycle near the psychologically important 115.00 look safe as long as US treasury yields at the longer end of the curve remain rangebound, but trading above that level could get volatile if it is broken, as some options structures may be linked to its breaking or not breaking. The next test for the price action is clearly the Fed Chair nomination that appears imminent – possibly today or over the weekend (more below in What are we watching next?).
Gold (XAUUSD) has spent the week trading within a relatively narrow range between $1850 and $1870 as it awaits a fresh catalyst following last week’s breakout. The impressive rally that occurred despite headwind from a stronger dollar has stalled with bond yields picking up and the market wondering how the US Federal Reserve will manage the current inflation spike. Silver and especially platinum have both struggled to keep up with gold while ETF investors have yet to show any interest in accumulating exposure. All developments raising the risk of a retracement towards the $1830-35 key area of support.
Crude oil (OILUKJAN22 & OILUSDEC21) managed to recover yesterday after the market brushed aside the potential negative price impact of a US SPR release. US attempts to attract wider support from other major importing countries seems to have fallen flat, except for China who is “working” on a release. Having dropped more than five dollars since speculation began, the market has concluded for now that the price impact of a release could be limited. The market, however, may still have to deal with the recent updates from EIA and IEA, in which they both forecast current tight market conditions could start to ease early next year as well as renewed Covid-related reductions in mobility.
US Treasuries (IEF, TLT). Yesterday’s 10-year US TIPS auction stopped through, pricing at a record low yield at -1.145%. It is a signal that investors are ever more concerned about inflation risk. The Treasury also sold 4-week and 8-week T-Bills. While the latter was priced in line with the Reverse Repurchase facility, 4-week T-Bills priced with a yield of 0.11%, more than double the RRP rate. As we approach the day in which the Treasury will run out of cash, we expect volatility in the money market to increase, while long-term yields will remain compressed as they will serve as a safe haven. In the meantime, the move index continues to rise indicating that the bond market remains on the hedge.
What is going on?
Central Bank of Turkey cut another 100 basis points from the policy rate, lira plunge extends. The Turkish lira has lost more than 10% versus the US dollar this week and trades well over 11.00 after Turkish President Erdogan earlier this week declared himself once again against high interest rates, which he believes cause inflation. Central bank chief Kavcioglu, who is seen as doing Erdogan’s bidding, cut rates for a third time by 1.0% to take the policy rate to 15%, but with the Turkish lira losing over 10% this week alone and more than 30% since Erdogan fired the prior more hawkish central bank head in favour of Kavcioglu, inflation will run far beyond the rate. Not even some guidance that the easing cycle may conclude in December was enough to halt the lira’s slide.
US Nov. Philly Fed survey hits 39.0, a very hot reading and fourth highest ever - with Prices Paid at 80 and just missing the 42-year high of 80.7 in June, although the Prices Received was at 62.9, the highest since 1974. Special survey questions in the Novemer survey included one on inflation expectations, with firms expecting a median 5.3% increase in their own prices, and an increase in wages of 4.8%. The median forecast for 10-year inflation was 3.5%, up from the 3.0% the last time the question was asked in August.
The Bloomberg Agriculture Index hit a fresh five-year high this week with food prices likely to stay high in 2022 with labor shortages, La Ninã weather impacts, surging cost of fertilizers being the common denominator across the sector. Recent gains being led by coffee, which we highlighted earlier in the week as a commodity currently seeing multiple price supportive developments. Wheat is heading for a nine-year high in Chicago while hitting record highs in Europe with inventories tumbling amid strong demand from importers and now also a rain threat to the soon-to-be harvested Australian crop. Soybeans have seen a strong bounce after the latest WASDE report showed a tighter than expected outlook for the coming year, and following a recent rush of Chinese buying from the US and South America.
Apple doubles down on self-driving cars. The company is aiming to develop fully autonomous driving capabilities for cars by 2025 under the project name Titan. Apple has developed its own chip and is aiming to soon have a car on the roads for testing. However, delivering self-driving cars is a difficult endeavor with Uber Technologies having sold its unit and Waymo (Google’s unit) has been struck by fatigue and key people leaving the project. Tesla is also still struggling to deliver self-driving cars.
What are we watching next?
Who will US President Biden nominate to head the Fed next February? Powell is still seen as more likely to get the nod that Brainard by roughly two to one, and this Fed Chair nomination issue is hanging over the markets, as the current Fed chair term ends in early February and from comments made earlier this week, an announcement could be made any day now. One uncertainty that would come with a Brainard nomination is the potential difficulty of having her nomination approved by the Senate. The nomination news could generate significant short-term volatility on the choice of the nominally more dovish Lael Brainard over current Fed Chair Powell, though we see little difference in the medium-longer term implications for monetary policy, and the Fed is likely to get a prominent new regulatory role either way (under Brainard or someone else if she is nominated to replace Powell).
Vote on $1.7 trillion US fiscal bill today in the House of Representatives after the Congressional Budget office said the bill, which focuses on social spending and climate initiatives, would add some $367 billion to the US Federal deficit (around 1.5% of current US nominal GDP) over the next 10 years.
Earnings Watch – there are no important earnings today and this earnings week has been good in the US and Europe, while a bit more mixed among Chinese companies. The list below shows earnings releases next week.
Monday: Sino Pharmaceutical, Prosus, Zoom Video, Agilent Technologies
Tuesday: Xiaomi, Kuaishou Technology, Compass Group, Medtronic, Analog Devices, Autodesk, VMWare, Dell Technologies, XPeng, HP, Best Buy, Dollar Tree
Wednesday: Deere
Thursday: Adevinta
Friday: Meituan, Pinduoduo
Economic calendar highlights for today (times GMT)
0830 – ECB President Lagarde to speak
1200 – UK Bank of England Chief Economist Huw Pill to speak
1330 – Canada Sep. Retail Sales
1715 – US Fed Vice Chair Clarida to speak on global monetary policy coordination
Follow SaxoStrats on the daily Saxo Markets Call on your favorite podcast app: