Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
Summary: The US equity market put in a solid advance yesterday even as treasury yields remain near recent highs. Sentiment in Asia recovered smartly overnight after a stumble yesterday. In FX, yesterday's sharp USD advance paused, while in commodities, oil is pushing back higher near important resistance levels and gold is nearing major support after a drop of more than a hundred dollars per ounce in just two weeks.
Strong US retail sales figures for January and the NAHB Housing Market Index both showed yesterday that the US economy is humming along despite the interest rate shock. Equities shrugged off the implications for further rate hikes and potentially higher long-term interest rates and rallied with S&P 500 futures closed the session at the highest close price in six sessions above the 4,150 level. The uptrend remains intact at this point with the 4,200 level still in play. The US 10-year yield hit 3.8% on the close yesterday.
Early in China’s equity session, the Hang Seng Index and CSI300 gained sharply after a strong US session, but sentiment rolled over badly into late trading, with the Hange Seng approximately flat and CSI 300 down about 1% as of this writing. Qiushi Magazine, a mouthpiece of the Chinese Communist Party, published an excerpt of President Xi’s speech delivered in December, in which the Chinese leader highlighted insufficient aggregate demand as the paramount challenge so expanding consumption is a top policy priority.
AUDUSD fell sharply yesterday and stumbled again overnight on the release of weak Australian jobs numbers, but bounced on a recovery in sentiment in China and bounce in metals prices, also keeping away from the pivot low of 0.6856 of earlier this month. Elsewhere, sterling weakness from yesterday’s soft UK CPI release lingered. EURGBP jumped back higher yesterday and GBPUSD even tested below 1.2000 briefly before recovering very slightly. The focus there is on the 1.1941 low and 200-day moving average just above that level. USDJPY surged further yesterday on a fresh rise in global yields and as the Bank of Japan’s rear-guard actions to defend its yield curve control policy mean the bank is effectively doing aggressive QE even as markets anticipated a coming shift away from this policy. Focus today on US housing-related data after the Feb.
A series of signals from US CPI reported on Tuesday to retail sales print yesterday suggest more ammunition for the Fed to raise rates. This has boosted the market pricing of the Fed terminal rate, and dollar strength is back in focus, weighing on commodity prices. Crude oil prices extended their losses after US oil inventories rose 16.3mn barrels to 471mn barrels against expectations of 1.17mn suggesting demand concerns. But reports of passenger loads picking up at China’s top three airlines added optimism overnight. WTI prices rose back above $79/barrel while Brent was above $85. The International Energy Agency (IEA) also raised its demand growth estimates by 0.1mb/d to 2mb/d for 2023.
Gold prices fell further to $1830/oz as US yields surged higher after the January CPI print, and a hawkish tilt was also seen in Fed commentaries. Last night, US retail sales was also hot suggesting more room for the Fed to hike rates, which boosted the USD. The next important levels include the 1,829 level, which is the 38.2% retracement of the rally off the November lows, the 1,809 area which was broken on the way up, and then the 200-day moving average, currently coming in just above 1,775. Pressure on gold miners to do more deals is rising, despite Newcrest’s rejection of the takeover bid from the world’s biggest gold miner Newmont.
Yields on the 10-year Treasury notes jumped 6bps to 3.8% following stronger-than-expected 3% headline retail sales and 1.7% control group (ex-autos, gasoline, and building materials) prints and a rebound in the Empire State Manufacturing Index to -5.8 from -32.9. While the 20-year Treasury bond auction received decent demand with a bid/cover ratio at 2.54, new issuance of around USD 30 billion from corporate, including USD 24 billion from Amgen weighed on the market. Yields on the 2-year climbed 2bps to 4.63%, bringing the 2-10 curve 5bps less inverted to -83bps.
January retail sales in the US jumped higher by the most in almost two years, in another signal that the US consumer demand is holding up strongly despite high inflation and interest rate pressures. Retail sales expanded 3.0% month-on-month after a decline of 1.1% in December and above the 1.8% expected. Strength was broad-based, with ex-gas/autos rising 2.6% from the prior -0.7%. The control group, which is a useful gauge of consumer spending data, rose 1.7%, also beating expectations of 0.8% and above the prior -0.7%. Factory output also beat estimates, rising 1.0%, although industrial production was flat vs. +0.5% gains expected, mostly weighed by reduced heating demand in January.
Airbus has had a relatively good year as aviation demand is coming back after the pandemic with fiscal year free cash flow beating estimates and dividends per share set to €1.80 vs est. €1.73. Q4 revenue is €20.6bn vs est. €20bn. Airbus is disappointing a but on its FY23 adjusted EBIT outlook relative to estimates and delays its A320 output target of 75/month to 2026. Schneider Electric reports Q4 revenue that beats estimates driven by strong organic revenue growth and it reports FY23 revenue growth of 9-11% y/y and adjusted EBITA margin up 50-80 basis points.
The e-commerce platform reported Q4 revenue of €1.73bn vs est. €1.65bn with gross merchandise volume also beating estimates. The company expects the gross margin to expand in Q1 but the Q1 revenue outlook of high-teen growth rate compared to 20% expected by analysts sent shares lower in extended trading.
Russia said its troops had broken through two fortified lines of Ukrainian defenses on the eastern front, as the one-year mark of the invasion approaches. The advances come as Western allies announced more military aid for Kyiv including artillery rounds. Meanwhile, China is warning of retaliation against US entities involved in the shooting of the balloon. Biden is considering a public address on the downing of an alleged Chinese spy balloon and other unidentified objects. With geopolitical tensions on the rise, Saxo’s equity theme basket on Defense remains worth a consideration. There were also reports that Germany is poised to increase its defense budget by as much as €10 billion next years.
The Aussie unemployment rate rose to 3.7% in January (vs the market expecting a steady rate of 3.6%), while Australian jobs surprisingly fell 11,5k versus market expectations for +20k, and full-time employment actually fell –43k. Yesterday Australia’s biggest bank Commonwealth Bank also warned that its customers are experiencing ‘significant strain’, amid higher price pressures.
Yesterday, the US February NAHB Housing Market survey surged 7 points from its January reading, suggesting a fading impact from the mortgage interest rate shock last year. The reading was a 5-month high. Today we get further US housing-related data, including the January Housing Starts and Building Permits figures. We’ll also see the latest weekly jobless claims after a string of four readings below 200k.
Today’s US earnings focus is Applied Materials and DoorDash with analysts expecting Applied Materials to deliver revenue growth of 7% y/y and EPS of $1.94 down 1% y/y. DoorDash, which has been part of our bubble basket, is expected to revenue Q4 revenue growth of 36% and EBITDA of $109mn which seems quite unrealistic given EBITDA was $-147mn a quarter ago.