Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
You can access all of our platforms from a single Saxo account.
Strong ISM Services reading is a party killer
5 minutes to read
Peter Garnry
Chief Investment Strategist
Summary: The rally in equities since mid-October has put the equity market in a bad risk-reward situation with equities pricing a rosy scenario with no recession and inflation coming back to normal levels with the Fed cutting rates in 2023. This milk and honey scenario will be severely tested in the coming months as the ISM Services Index for November showed yesterday. The services sector is still strong and inflationary pressures are still high with all roads still leading to high inflation.
Has the rally in S&P 500 ended for now?
In a recent string of equity notes (see bullets below) we have laid out our thinking about equities, earnings, operating margins, inflation and the economy as 2023 is approaching. These views have been in contrast to the equity rally that has unfolded since mid-October when the market began betting hard on “peak inflation” leading to a Fed pivot in 2023. However, yesterday’s ISM Services Index fir November came out at 56.5 vs est. 53.5 and up from 54.4 in October suggesting the US services sector remains impressively resilient. Prices paid in the survey remained high at 70 (the level since July) fitting well with the 7.5% annualised in the US services sector excluding energy as we described in our equity note following the US October inflation print back in mid-November.
S&P 500 futures traded 1.8% lower on the figures as interest rates got repriced and investors scaled back. The important question is not whether we have peak inflation rate, as that is most likely the case, but rather what is the floor in the inflation rate related to the structural dynamics in the economy. Years of low inflation and below needed investments in mining and energy will continue to haunt investors with higher inflation coupled with a war economy dynamic around global supply chains reshoring manufacturing to more expensive places than China. As we say in the Saxo Strats team all roads lead to inflation from now on and the market is now prepared for that. We maintain our defensive view on equities and maintain our S&P 500 target of 3,200 as the earnings recession that is likely to occur in 2023 has not been priced into equities.
Recent Saxo equity notes:
Latest Market Insights
Quarterly Outlook
-
-
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
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 ... -
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
Commodity Outlook: Gold and silver continue to shine bright
Ole Hansen
Head of Commodity Strategy
-
Quarterly Outlook
FX: Risk-on currencies to surge against havens
Charu Chanana
Chief Investment Strategist
Explore the outlook for USD, AUD, NZD, and EM carry trades as risk-on currencies are set to outperfo... -
Quarterly Outlook
Equities: Are we blowing bubbles again
Peter Garnry
Chief Investment Strategist
Explore key trends and opportunities in European equities and electrification theme as market dynami... -
Quarterly Outlook
Macro: Sandcastle economics
Peter Garnry
Chief Investment Strategist
Explore the "two-lane economy," European equities, energy commodities, and the impact of US fiscal p... -
Quarterly Outlook
Bonds: What to do until inflation stabilises
Althea Spinozzi
Head of Fixed Income Strategy
Discover strategies for managing bonds as US and European yields remain rangebound due to uncertain ... -
Quarterly Outlook
Commodities: Energy and grains in focus as metals pause
Ole Hansen
Head of Commodity Strategy
Energy and grains to shine as metals pause. Discover key trends and market drivers for commodities i...