Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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"It's all about the Federal Open Market Committee meeting today, there's an awful lot on the agenda, a lot of ways developments can be spun, both to the hawkish and the dovish direction, but I think that the general takeaway is that there's nothing that's going to sustain lower expectations for the Fed from here," says John J Hardy, Saxo's Head of Forex Strategy.
One intriguing possible development, he adds, would be that the Fed might take a look at its pace of balance sheet tightening because the huge fiscal drag from Trump's tax reform might make it uncomfortable with being on a preset schedule for its quantitative tightening. "I think that's the only credible somewhat dovish argument out there but otherwise on the rate front, I think there's nothing that's going to be seen as dovish," Hardy says. One possible novelty would be the introduction of a press conference at every meeting, meaning that each meeting from now on would be "live" in terms of monetary policy adjustments, he concludes.
Elsewhere in the FX space, today's US rate hike is set to pile more pressure on beleaguered emerging market nations, particularly those with substantial current account deficits, notably Brazil, Mexico and South Africa.
For equities, the FOMC meeting and expected US rate hike has taken the wind out of their momentum and put them on pause for now, with some profit-taking in Asia overnight, says Peter Garnry, Saxo's Head of Equity Strategy. Among individual companies, electric vehicle maker Tesla is in the spotlight following a decision by the cash-strapped company to cut 9% of its workforce, though none from production units. "We've got a negative rating on Tesla," Garnry says.
In commodities, gold is sitting on the fence waiting to see if the FOMC delivers another "dovish hike", says Ole Hansen, Saxo's Head of Commodity Strategy. "Gold is staying glued to $1300/oz ahead of the expected seventh US rate hike in this cycle," he adds. Upside risk is building on a dovish hike with open interest at a 6-month low and the fund net-long being close to a two-year low. The level to watch is $1308/oz with downside capitulation risk below $1286/oz.
Crude oil is also rangebound but for a different reason – it's being pulled in opposite directions by opposing forces with internal Opec opposition against raising production being offset by a Russian desire to eliminate the 1.8 million barrels/day cutbacks agreed back in 2016.
Finally today, the much-talked.about Trump/Kim summit was a non-event for the bond market and the yield on the 10-year US Treasury closed almost unchanged at 2.96%
The chief risk from today's FOMC is that a hike will provoke more flattening of the yield curve, and possible even invert it, heralding another economic downturn, says Althea Spinozzi, of Saxo's bond trading desk.
Quarterly Outlook
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