Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
Summary: A relatively muted but supportive stock market session on Monday continued overnight where China growth concerns weighed on tech shares but overall left the markets higher ahead of today’s US CPI report which is expected to slow inflation slowed further last month, potentially bringing a firmer belief in peak rates back on the table. Treasuries were little changed while the dollar traded in narrow ranges against its major peers. Also, some optimism that Wednesday’s Biden-Xi summit may help ease tensions between the world’s largest economies. Oil and gold both climbed from key support levels.
The Saxo Quick Take is a short, distilled opinion on financial markets with references to key news and events.
Equities: Global equities remain well bid with a strong technical backdrop with S&P 500 futures trading around the 4,427 level, although Australian economic data overnight delivered mixed signals for October with NAB Business Confidence improving while consumer confidence worsened. Today’s main macro events are German ZEW Survey (Nov) and later US October CPI report expected to deliver an unchanged core inflation at 4.1% y/y. Foxconn Q3 results were better than expected suggesting that consumer electronics markets may have bottomed; Foxconn results and positive price action may spill over into Apple shares. In the mining sector, Canadian Teck Resources are in late stage talks to sell its coal business to Glencore. This morning in Europe, Delivery Hero is out raising its FY GMV to the high end of its forecasted range.
FX: The dollar trades muted with traders looking ahead to the US CPI print this afternoon. USDJPY trades near a multi-year high after suspected intervention or options expiry on Monday briefly saw the pair drop to 151.20 before returning to trade around the current 151.80. AUDUSD has stabilised mid hawkish leaning RBA commentary but held below 0.64 in Asia while GBPUSD failed a test of 1.2280 amid PM Sunak's latest Cabinet reshuffle and UK’s wage and CPI will be on watch in the next two days.
Commodities: Crude oil prices rebounded after last week's demand fear and long liquidation driven selloff was deemed to be overdone, and not fully reflecting current fundamentals. Ahead of today’s IEA oil report for November, OPEC slightly revised upwards its forecast for world oil demand growth in 2023 saying China’s crude oil imports are very healthy and Asian refining margins are strong. Meanwhile, Copper bounced after finding support ahead of $8000/t despite growth headwinds in China and ROW. Gold bounced after holding support in the 1933-35 area with focus now turning to US CPI data. Complex. CBOT soybean futures rallied sharply on Monday on Chinese demand and scorching heat in Brazil, where farmers are expected to face crop-stressing temperatures over the next several days
Fixed Income: last week’s ugly 30-year US Treasury auction and hawkish Powell’s remarks reignited the bear-steepening trend of the yield curve. On Friday, Moody’s changed the outlook of the U.S. debt to negative from stable, exposing the country to the risk of another downgrade due to its deficit unsustainability and increase of political polarization. The ten-year US treasury closed the week above 4.50%, remaining in an uptrend. The focus shifts to today’s US CPI numbers, with the YoY core numbers expected to remain unchanged at 4.1%, but headline numbers expected to fall to 3.3% from 3.7%. Any surprise to the upside could push back expectations for future rate cuts. On Wednesday, inflation figures are also released in the UK. Overall, we expect yield curves to continue to steepen, and the long part of the yield curve to remain vulnerable to supply-demand dynamics and inflation expectations.
Volatility: The VIX ticked up a little higher yesterday to $14.76 (up $0.59 / 4.16%), while S&P 500 stayed around the close of last week, ending yesterday’s session at $4411.55 (-3.69 / -0.08%), after a fairly calm session, awaiting the release of CPI-numbers later today. VIX futures also stayed mainly flat during the nightly session, at $15.90 (+0.055 or 0.34%). S&P 500 & Nasdaq futures stayed put overnight at $4426.50 (+0.03%) and $15567 (+0.13%) respectively.
Technical analysis highlights: S&P 500 above 4,400 bullish trend, next resist at 4,540. Nasdaq 100 resistance at 15,561 & 16K. DAX above 15,280 resist, next 15,575 but rejected at 55 DMA, RSI still negative. EURUSD resistance at 1.0765. USDJPY rejected at 152.00, break above likely move to 153-154. Gold likely to bounce to 1,980. Bottom and reversal in Crude oil: Brent oil support at 78.20. WTI at 73.85. US 10-year T-yields could bounce to 4.80
Macro: The New York Fed’s survey of consumer expectations showed 1yr ahead inflation expectations reading slip from 3.67% to 3.57% (back close to its cycle low of 3.55% recorded in July). The 3yr remained unchanged at 3.0%, and the 5yr fall to 2.7% from 2.8%, paring some of the inflationary concerns from the University of Michigan's survey. October inflation print due today will be in focus.
In the news: India Weighs Five-Year Tax Cuts on EV Imports to Woo Tesla (Bloomberg), US retailers stuck with excess stock offer bargains as holiday season nears (Reuters), Cameron returns as UK foreign secretary after Braverman sacked (FT), Walmart, Target earnings to offer clues on crucial holiday season (Reuters), A possible downgrade of Italy to junk this week would be hugely symbolic, potentially consequential (Bloomberg), Germany set to double Ukraine military aid, lifting Germany's defence spending to 2.1% of its GDP (Reuters).
Macro events (all times are GMT): Ger ZEW Survey (Nov) Expectations 5 vs –1.1 prior and Current Situation –77 vs –79.9 prior (1000), IEA’s Oil Market Report (1100), US CPI (Oct) exp. 0.1% & 3.3% vs 0.4% & 3.7% prior (1330)
Earnings events: Key earnings results from RWE, Vodafone (bef-mkt) Nubank (aft-mkt), Alcon (aft-mkt), Home Depot (bef-mkt), and Meituan. Our focus is Home Depot reporting FY24 Q3 (ending 31 October) earnings with analysts expecting revenue growth of -3% y/y and EBITDA $6.1bn down $6.9bn from a year ago.
For all macro, earnings, and dividend events check Saxo’s calendar