Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Summary: US treasury yields rose yesterday as markets came back from the long weekend and absorbed Friday’s US jobs data, which was released on a bank holiday. US stocks closed almost flat after an intraday sell-off. USDJPY jumped higher on the rise in yields and as the new Bank of Japan governor Ueda affirmed commitment to continuity of policy. Chinese March inflation data released overnight showed further disinflation.
Saxo’s quarterly outlook is out, and it looks at global fragmentation and how it will impact a variety of asset classes, geographical regions and macroeconomic topics in Q2 and beyond. Discover how it challenges the outlook for equities, creates discrepancies between forex pairs, shapes intriguing investment opportunities in different Asian regions, and how commodities and interest rates may affect and be affected by the Fragmentation Game. Get our in-house analysts' views on the investment landscape in a tough macroeconomic world and plan your investment strategy for Q2 2023 and beyond
S&P 500 futures tested yesterday for the third time the 4,100 level and bounced back suggesting a technically strong equity market as the Q1 earnings season starts this week. The index futures are trading around the 4,140 level this morning with the 4,153 closing level from 3 April being the key level to watch on the upside should momentum extend further. The VIX Index remains below the long-term average and the US 10-year yield remains well anchored around the 3.4% level.
The Hong Kong equity market returned from the Easter holiday with a strong open but fading nearly all gains by mid-day. Hang Seng Index was flat from last Thursday’s pre-holiday close. Technology stocks underperformed as Hang Seng TECH Index shed 1% and Baidu (09888:xhkg) plummeted 6.8%. Chinese developers gained, with leading names rising over 5%. In A-shares, CSI300 dropped by 0.4%, as white liquor and solar stocks led the decline. China is reportedly going to conduct a security review of AI-generated content services. On economic data, China’s CPI growth fell to 0.7% y/y in March from 1.0% in February, below the 1% consensus estimate. The fall in PPI accelerated to -2.5% y/y in March from -1.4% in February.
The US dollar was sharply stronger yesterday as US yields rose, perhaps partly in delayed reaction to resilient, if mixed, US jobs- and earnings data from Friday, which was a banking holiday, but mostly as a function of USDJPY buying on new Bank of Japan governor Ueda out affirming continuity of BoJ policy (more below). The USD rally was mostly erased in some places as risk sentiment rebounded from an early sell-off in yesterday’s session, but the broad JPY weakness on Ueda’s press conference comments remained. The data highlights on the US economic calendar this week include tomorrow’s March CPI and Friday’s March Retail Sales data.
Crude oil prices remain stuck in a tight range and following last week’s production cut related jump, Brent has traded close to $85 and WTI to $80 with a lack of follow-through buying highlighting a market torn between macroeconomic risks and tightening conditions. A stronger dollar has been added to the mix after Friday’s US job report raised the odds of further tightening from the US Federal Reserve. Hedge funds meanwhile responded to the OPEC+ production cut by increasing their WTI net long by 56% to 176k lots with the bulk of the buying being driven by short covering. Failure to break decisively higher may increase the focus on closing gaps, to $80 in Brent and $75.72 in WTI. Focus this week on US CPI and China’s credit data. In addition, monthly oil market reports from the three major forecasters, starting today with the EIA, followed by OPEC on Thursday and IEA on Friday.
Gold managed to recover back to $2k overnight after recording a two-day correction driven by a sharply stronger dollar and bouncing yields after Friday’s strong US jobs report led to speculation the FOMC would go for another rate hike. Hedge funds lifted bullish gold bets to a one-year high at 145k lots in the week to April 4 as positive momentum and lack of major correction continued to feed speculative demand for gold, silver and platinum. Data on inflation and retail sales this week will be watched closely for clues about the short-term direction of rates. Support at $1970, the 21-DMA, and $1950 while a renewed push above $2032 would signal a return to the March 2022 record high of $2070.
Following the solid employment report last Friday, investors continued to adjust upward the odds for a 25bp rate hike at the May FOMC and took it up to 80%. The upcoming supply of USD90 billion refunding auctions from Tuesday to Thursday also weighed on Treasury prices. Yields across the curve climbed 2-3bps with the 2-year yield back above the 4% handle to 4.01% and the 10-year yield rose to 3.42%.
The International Monetary Fund released its latest World Economic Outlook (WEO) that argued that US and other industrial countries will revert to ultra-low levels of interest rates that prevailed before the pandemic, with the US neutral rate comfortably below 1%. This would be driven by aging populations and sluggish productivity which suggest that growth will remain meagre. Meanwhile, the World Bank revised its 2023 global growth outlook slightly upward to 2% from a January forecast of 1.7% but said that the slowdown from stronger 2022 growth will increase debt distress for developing countries. But this didn’t come without a warning that turmoil in the banking sector and higher oil prices could again put downward pressure on growth prospects in the second half of 2023.
Samsung, one of the world’s largest semiconductor manufacturers, is cutting its memory chip production as its profitabilty hits lowest levels since 2009. Lower inventories on memory chips were recently highlighted by Micron Technology as necessary to restore meaningful inventory levels and pricing. TSMC also missed sales estimates in its preliminary Q1 earnings release suggesting investor expectations are still too high for economic growth.
After a decade at the helm, Kuroda retired as the Bank of Japan chief on April 8 and Kazuo Ueda was appointed to the job. In his first press conference as the Governor, Ueda reaffirmed his commitment to yield curve control in the current economic conditions and prices. His policy stance appears to be a continuation of Kuroda’s dovish steps, but he has also kept the door open for any tweaks in policy if markets are under pressure. That means that market participants will continue to expect some tweaks in the BOJ policy, especially as we head into Ueda’s first policy meeting on April 27-28. FinMin Suzuki was also on the wires this morning and said that Ueda and PM Kishida do not think that an immediate re-think on joint policy accord on inflation will be needed.
Berkshire Hathaway made several successful investments across a group of Japanese commodity trading houses back in the early days of the pandemic and the investment group has more appetite for Japanese investments. Berkshire has kicked off a yen bond sale and Warren Buffett recently said that he had increased his equity allocation in Japanese equities to 7.4% from 5%. Japanese equities trade at a significant discount to global equities and Japanese companies have in aggregate terms a negative net debt position (more cash than debt) and is priced at a 12-month forward dividend yield of 2.7%.
Federal Reserve Bank of New York President John Williams said on Monday that financial system troubles that drove the central bank to provide large amounts of credit to banks is not collateral damage from the Fed’s aggressive effort to lower inflation. Williams said he viewed the trouble at the two banks as unique in nature and unlikely to reflect broader trends in the financial system. Still, the turmoil in the banking sector has led market participants to believe that the rapid pace of tightening from the Fed has broken something or will break something.
Apple’s personal computer shipments declined by 41% y/y in the first quarter, marking a tough start to the year for PC makers still grappling with a glut of unsold inventory. Shipments by all PC makers combined slumped 29% to 56.9mn units, and fell below the levels of early 2019, as the demand surge driven by pandemic-era remote work evaporated, according to IDC’s latest report. Lenovo and Dell also registered drops of over 30%, while HP’s shipments were down 24%.
Chicago wheat futures were higher on Monday, as dry weather put Kansas City wheat at risk and after Russia threatened to bypass a UN-brokered grain deal. Corn also closed higher, though soybeans dipped as warm and dry weather improved the US planting outlook. Russia on Friday threatened to bypass the UN-brokered grain deal unless obstacles to its agricultural exports were removed, while talks in Turkey agreed removing barriers was a necessary condition to extending the agreement beyond next month. Drought in Kansas, which accounts for 25% of US winter wheat output and 17% of the total US output, continues to support the KCB HRW futures contract (KEc1) with the premium over Chicago Wheat (ZWc1) continuing to reach new highs. In today’s WASDE report, traders will primarily be watching South American production US ending stocks.
Several important data points from China will be reported this week and focus will remain on how supportive authorities remain on driving economic growth. Data for March credit financing will be in focus (no specific date for this report) to assess the liquidity provisions and support to the property sector. March Inflation was out overnight and showed producer prices falling –2.5% YoY as expected, with the CPI softer than expected at +0.7% YoY (vs. 1.0% exp.). Inflation data this soft will likely continue to provide room for the People’s Bank of China to announce targeted easing measures if economic momentum fails to pick up in-line with their expectations. Trade data for March is also due on Thursday, and both exports and imports are expected to show a YoY decline.
The Q1 earnings season starts this week with US banking earnings as the highlight on Friday. S&P 500 12-month forward EPS estimates have been rising since late February by 1.2% suggesting analysts are less worried about credit conditions, the recent banking crisis, and the slowing economy.
Analysts expect JPMorgan Chase to report Q1 net revenue of $39.7bn up 18% y/y and EPS of $3.39 up 21% y/y, but with the recent banking crisis the outlook is more important and especially JPMorgan’s comments about funding costs and loan growth outlook. Delta Air Lines earnings on Thursday are also worth watching for insights into business traveling. Analysts expect Q1 revenue growth of 28% y/y and EBITDA of $1.17bn up from a loss of $282mn a year ago.
This week’s earnings releases:
0900 – Eurozone Feb. Retail Sales
1000 – US Mar. NFIB Small Business Optimism
1600 – USDA's World Agriculture Supply and Demand Estimates (WASDE)
1600 – EIA's Short-term Energy Outlook (STEO)
1700 – US Treasury to auction 3-year notes
1730 – US Fed’s Goolsbee (Voter 2023) to speak
2200 – US Fed’s Harker (Voter 2023) to speak
2330 – US Fed’s Kashkari (Voter 2023) to speak
2030 – API's Weekly Crude and Fuel Stock Report