Quarterly Outlook
Macro outlook: Trump 2.0: Can the US have its cake and eat it, too?
John J. Hardy
Global Head of Macro Strategy
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Fixed income market: the week ahead
Althea Spinozzi
Head of Fixed Income Strategy
Summary: The Federal Reserve meeting, stimulus bill talks and PMI data will dictate US Treasuries' performance this week. The market is expecting the Fed to increase its purchases of long-term bonds to slow down the rise in yields. To add pressure to Treasuries could be an unsuccessful stimulus bill and worse than expected PMI figures caused by an acceleration of Covid-19 cases. In Europe, sovereigns will continue to rally as new lockdown measures are imposed in several countries, and the ECB will continue to stimulate the economy in the foreseeable future. In the United Kingdom, as a hard Brexit looks likely, ten-year yields will continue to fall until they test the benchmark bank rate at 0.1%.
Prepare for a busy week ahead. In the US, bond investors will be waiting impatiently for the Fed meeting. Even if US Treasury yields have been falling to historic lows during the coronavirus pandemic, the US yield curve has been steadily steepening since 2018 until today. The rally in Treasuries has been caused by the central bank cutting the federal funds rate pushing yields lower, especially in the front part of the yield curve. Longer yields followed, but as inflation expectations have been recently rising, they started to point higher while short-term yields are stable. The reflation story lifted 10-year yields from a historic low of 0.5% in July to near 1% as of recent. The market is looking anxiously at long term-yields rising because they are conscious that if they soar too fast, they might provoke a sell-off in the stock market. During this week's Fed meeting, it's crucial to understand whether the central bank may be looking to expand its bond-buying program to longer maturities in an effort slow down rising yields. Currently, the Fed is purchasing bonds at a pace of $80 billion a month, which concentrates in the front part of the yield curve.
Stimulus bill talks and Markit PMI figures will also be significant. The latter will show whether the labour market has been weakening since Covid-19 cases accelerated. The Fed meeting and PMI figures might cause yields of long-term Treasuries to fall even further.
On Friday, two-year yields touched 0.115%, the lowest since the beginning of August. At the same time, ten-year yields broke below their ascending wedge and closed at 0.89%. If a dovish sentiment prevails this week they might fall near 0.80%.
The European bond market on Friday has been digesting the ECB policy meeting. The rally in European sovereigns resumed, and for the first time in history, Spanish 10-year Bonos closed with a negative yield, adding to the pile of negative-yielding debt which has hit around $18 trillion.
The rally in European sovereigns will continue. Even if Lagarde mentioned that the ECB might not deploy in full the PEPP program, the central bank's economic forecasts painted a difficult few years ahead of the bloc. The economy is going to recover, but slower than expected, and inflation in 2023 is expected to be well below the ECB target rate. Therefore, the ECB will have no other alternative rather than continuing to stimulate the economy. Inevitably, this will push those European rates that remain above positive, below zero.
In the UK, as a hard Brexit looks more and more likely, yields will continue to fall. As per my earlier analysis which you can find here, ten-year Gilts might try the benchmark bank rate at 0.1% in case of a hard Brexit.
Economic calendar:
Monday the 14th of December
- Japan: Industrial Production
- China: Foreign Direct Investment (FDI)
- Eurozone: Industrial Production
Tuesday the 15th of December
- Australia: RBA meeting minutes
- China: National Bureau of Statistics (NBS) press conference, Retail sales
- Switzerland: SECO Economic Forecasts
- United Kingdom: Claimant Count Change, ILO unemployment rate, average earnings
- United States: Industrial Production
- Canada: BOC's Governor Macklem Speech
- Australia: Westpac Leading Index
- Japan: Merchandise Trade Balance
Wednesday the 16th of December
- United Kingdom: Consumer Price Index, Retail Price Index, PPI Core Output, Market Manufacturing PMI, Markit Services PMI, Markit PMI Composite
- France: Markit Manufacturing PMI, Markit Services PMI, Markit PMI Composite
- Germany: Market Manufacturing PMI, Markit Services PMI, Markit PMI Composite
- Eurozone: Market Manufacturing PMI, Markit Services PMI, Markit PMI Composite, Labour Cost
- Canada: BOC Consumer Price index
- United States: Retail Sales, Market Manufacturing PMI, Markit Services PMI, Markit PMI Composite, FOMC Economic Projections, FED Interest Rate Decision, FOMC Press Conference
- Switzerland: Swiss National Bank Quarterly Bulletin'
Thursday the 17th of December
- Australia: Employment Change, Unemployment Rate
- Switzerland: SNB Monetary Policy Assessment, SNB Press Conference
- Eurozone: Consumer Price Index
- United Kingdom: BOE Monetary Policy Committee, BOE Asset Purchase Facility, Bank Of England Minutes
- United States: Initial Jobless claims, Covid-19 Vaccine Announcement
- Japan: National Consumer Price Index
Friday the 18th of December
- United Kingdom: GFK Consumer Confidence, Retail Sales, Current Account
- Japan: BOJ Monetary Policy Statement, BOJ Press Conference
- Germany: Producer Price Index, IFO Business Climate
- Canada: Retails Sales
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