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
You can access all of our platforms from a single Saxo account.
Stagflation builds the case for short-term real and nominal sovereigns
Althea Spinozzi
Head of Fixed Income Strategy
Summary: European and UK PMIs and stubborn inflation expectations paint the perfect stagflation picture for the old continent. While the BOE might need to tighten further, the ECB is unlikely to hike rates again. As the hiking cycle ends, short-end government bonds provide enticing returns. However, short-term inflation linkers remain in the spotlight as inflationary pressures might resurface in the last quarter of the year.
Germany and the Netherlands are in a recession, and PMI numbers paint an ugly picture for Europe. Yet, inflation expectations have slowly risen, showing that the ECB 2% target might not be plausible.
Within this context, the ECB will have its hands tied as it won't be able to cut or hike rates, not to spur inflationary pressures, nor to drive the euro economy into a recession.
That means that front-term yields will be anchored for some time, while long-term yields might adjust lower as a recessionary picture develops.
Although things might be different for the BOE as another rate hike might be necessary, it is impossible not to acknowledge the attractiveness of short-term government bonds within this context.
As uncertainty remains elevated, we favor short-term European government bonds, especially inflation linkers, as inflationary pressures might resurface during the last quarter of the year.
The 2-year German swap remains elevated.
It indicates that market expectations are still anchored around a higher for longer rate scenario, providing little room for government bonds to rally. That explains the bull flattening of the European yield curve after the ugly PMI reading, with 2-year Schatz yields remaining around 3%. Indeed, while bond future markets have pushed back on bets of another ECB interest rate hike, they are still pricing a 10bps hike by September and 15bps by October.
Europe’s inflation expectations have increased since last month
The problem the ECB is facing is that amid an economy in contraction, inflation expectations have increased within the last month. That builds a floor for front-term yields, while long-term yields are able to fall amid recessionary fears.
Short-term European sovereign bonds
Latest Market Insights
Quarterly Outlook
-
-
Quarterly Outlook
Equity Outlook: The ride just got rougher
Charu Chanana
Chief Investment Strategist
-
Quarterly Outlook
China Outlook: The choice between retaliation or de-escalation
Charu Chanana
Chief Investment Strategist
-
Quarterly Outlook
Commodity Outlook: A bumpy road ahead calls for diversification
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX outlook: Tariffs drive USD strength, until...?
John J. Hardy
Global Head of Macro Strategy
-
Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
-
Quarterly Outlook
Equity Outlook: Will lower rates lift all boats in equities?
Peter Garnry
Chief Investment Strategist
After a period of historically high equity index concentration driven by the 'Magnificent Seven' sto... -
Quarterly Outlook
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
Macro Outlook: The US rate cut cycle has begun
Peter Garnry
Chief Investment Strategist
The Fed started the US rate cut cycle in Q3 and in this macro outlook we will explore how the rate c... -
Quarterly Outlook
FX Outlook: USD in limbo amid political and policy jitters
Charu Chanana
Chief Investment Strategist
As we enter the final quarter of 2024, currency markets are set for heightened turbulence due to US ...