Macro Minutes

Let It Slow! Let It Slow! Let It Slow!

The BoC ended the year with another large rate cut but they are expected to SLOW the pace in 2025, while the Fed has already SLOWed down after an outsized move in September and seems locked in to deliver a regular size move tomorrow. The ECB should take it SLOW and the market is increasingly pricing a SLOW pace for the BoE. Central banks should proceed at a variable and uneven pace reflecting differences in macro fundamentals.

• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Simon Deeley (Desk Strategy), Canada Rates Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Different Trajectories

We are approaching final central bank decisions of 2024 with uncertainty about ultimate outcomes, but clear differences across jurisdictions on where economies are headed. In Canada, soft growth data has solidified our expectation for a second consecutive 50bp cut despite firmer inflation data last month, while US economic exceptionalism has markets pricing a material possibility of a skip on the 18th. Across the Atlantic, the ECB is debating between 25bp and 50bp, while the BoE looks set to pass at its final meeting of 2024. Meanwhile, FX and equity markets have been impacted by the central bank pricing volatility, incoming Trump administration and the threat of US tariffs.

• Simon Deeley (Desk Strategy), Canada Rates Strategist
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Elsa Lignos (Desk Strategy), Head of FX Strategy
• Lori Calvasina (Research), Head of U.S. Equity Strategy

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

2025 Outlook: Macro, Monetary Policy & Rates

For macro and bond investors, 2024 has been challenging. Despite central banks cutting rates, bond yields have remained high, and country-specific macroeconomic factors have heavily influenced allocation strategies. Looking ahead to 2025, returns in global fixed income will largely depend on the trajectory of the U.S. economy and the extent of the Federal Reserve's easing measures. Macro nuances are expected to continue playing a critical role in cross country performance.

• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Su-Lin Ong (Research), Chief Australia Economist
• Robert Thompson (Research), Australian Macro Rates Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Stimulus (Almost) Everywhere

The ECB delivered another cut today and there is more to come, the BoC is primed to start cutting in 50bp increments and do a lot over the cycle, the Fed should cut further but only a little bit, and China has recently delivered a lot of stimulus. The RBNZ has recently cut 50bp and could follow up with materially more. But the outlier is the RBA who is sitting patiently and doesn’t appear ready to cut anytime soon. So while most central banks are moving in the same direction there is notable differences in the speed and magnitude of cuts across countries.

• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Su-Lin Ong (Research), Chief Australia Economist
• Alvin T. Tan (Desk Strategy), Asia FX Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Super-Sized

The Fed delivered a super-sized rate cut to the start of the cycle last week. More likely they go back to smaller 25bp moves if labour data remains resilient. But another large move is not out of the realm of possibility. We think the BoC is on course for 5 straight 25’s but they could front-load with a 50bp move in October or December if growth data shows a large undershoot vs potential. The BoE and ECB seem set to take things slow, but a larger cut is a non-zero chance.

• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Elsa Lignos (Desk Strategy), Head of FX Strategy

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Back in Sync

With the Fed and ECB set to follow the BoC’s lead with 25bp cuts of their own, a number of the major central banks are now back in sync. So far, these central banks look to be proceeding gradually along their respective cutting paths, but the possibility of larger cuts still loom should economic conditions start to deteriorate. Meanwhile, others are proving even more cautious, with the next cut from central banks such as the RBA and BoE even further afield.

• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Simon Deeley (Desk Strategy), Canada Rates Strategist
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Su-Lin Ong (Desk Strategy), Chief Australia Economist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Is This Time Different?

There are nuances in every economic cycle but this one continues to feel different. Central banks are firmly in easing mode - the Fed will join the rate-cutting party in September. The timing and magnitude of rate cuts is the main topic for financial markets and is highly dependent on the assessment of the economic cycle. Listen to our macro and rates experts discuss the US, Canada, and European economies and central bank outlooks.

• Michael Reid (Desk Strategy), US Economist
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Volatility Galore!

We have seen very large market moves triggered by the US labour market report over the last few days that have also led to quite a few market participants changing their view on Fed rate cuts. We take a deeper dive into the data, highlight important questions that need answering and reiterate our rates call for the Fed and all other major central banks. We do not feel the need to make changes at this stage!

• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Simon Deeley (Desk Strategy), Canada Rates Strategist
• Cathal Kennedy (Desk Strategy), Senior UK Economist
• Su-Lin Ong (Research), Chief Australia Economist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Well Telegraphed?

Markets have been pricing more rate cuts again on the back of somewhat weaker data releases, specifically in the US. Yet, central banks remain reticent in telegraphing rates cuts clearly. Can the latter change and make markets price in even more?

• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Simon Deeley (Desk Strategy), Canada Rates Strategist
• Cathal Kennedy (Desk Strategy), Senior UK Economist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Green Light, Yellow Light, Red Light

Two G7 central banks have already cut – the ECB & BoC . Both should cut more as the year progresses while the BoE and Fed are likely to join the rate-cutting party later this year. At the other end of the spectrum is the RBA which is widely expected to keep the cash rate steady this year. Each country has its own nuances that will impact the timing and magnitude of policy changes, which we discuss in this podcast under the theme of green lights (i.e. what makes them move), yellow (what creates confusion or a pause), and red lights (what could stop them dead in their tracks).

• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Izaac Brook (Desk Strategy), US Rates Strategy Analyst
• Cathal Kennedy (Desk Strategy), Senior UK Economist
• Su-Lin Ong (Research), Chief Australia Economist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Cuts For Thee, But Not For Me

The BOC and ECB both kicked off long-awaited cutting cycles last week with questions about the depth and duration of these cycles likely to drive markets from here. But in other regions the case for pulling forward cuts is still somewhat weak. Where other central banks remain on hold, the trading environment might remain relatively rangebound into this summer.

• Simon Deeley (Desk Strategy), Canada Rates Strategist
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Su-Lin Ong (Research), Chief Australia Economist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Ready, Set, Go - Policy Divergence

Two developed market central banks have already cut - Riksbank and SNB - and the BoC, ECB and BoE should follow suit over the next couple of months. But the higher for longer theme is dominating the US rates market. The divergence in macro and policy is the major theme in rates markets. The other important theme is that despite Fed cuts being priced out, risk assets continue to perform well with the S&P making new highs and credit spreads at cycle tights.

• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Izaac Brook (Desk Strategy), US Rates Strategy Analyst
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Lori Calvasina (Research), Head of U.S. Equity Strategy

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Data Determination

Markets have been ultra-sensitive to data for some time now, going back to market pricing for hikes starting in late 2021. More recently, several strong US inflation prints have de-railed the potential for upcoming Fed cuts, while upside surprises have occurred in Canada, the UK and Australia in the recent weeks. Will these data points be determinant for upcoming central bank decisions? What important releases are to come?

• Simon Deeley (Desk Strategy), Canada Rates Strategist
• Michael Reid (Desk Strategy), US Economist
• Cathal Kennedy (Desk Strategy), Senior UK Economist
• Su-Lin Ong (Research), Chief Australia Economist
• Luis Estrada(Desk Strategy), LATAM FX Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Divergence - real or imagined?!

The latest resilience in the US has kick started a debate about how much other regions that appear to not show the same kind of underlying strength can diverge from the Fed and cut rates regardless. We see the best chances of that happening in Canada, but also provide updated views on the BoE, ECB and RBA. Meanwhile, the gyrations in the JPY keep investors on their toes and we add our voice to the mix of what lies in store.

• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Cathal Kennedy (Desk Strategy), Senior UK Economist
• Su-Lin Ong (Research), Chief Australia Economist
• Elsa Lignos (Desk Strategy), Head of FX Strategy

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Breaking Rank

Expectations for Fed rate cuts this year are wavering as US economic data continues to come in hot. But that economic performance hasn’t necessarily been replicated in other regions. Will other major central banks feel pressure to keep in step with the Fed or start marching to the beat of their own drummers?

• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Simon Deeley (Desk Strategy), Canada Rates Strategist
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Su-Lin Ong (Research), Chief Australia Economist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

When?

The question on everyone’s mind is when central banks will start cutting rates. Over the past month, market pricing has progressively gravitated from a near certainty that the BoC and Fed would cut by June to now under a 50% chance. In the UK the pricing for a June cut is higher than a month ago but less than two weeks ago, while for the ECB the market has been resolute in pricing a June start date.

• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Lori Calvasina (Research), Head of U.S. Equity Strategy

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

The Right Balance (Sheet)

While markets are parsing through central bank communication for the timing and pace of rate cuts, the future of central bank balance sheets is increasingly in focus as well. What will happen with quantitative tightening? And what will balance sheets look like in a future steady state?

• Simon Deeley (Desk Strategy), Canada Rates Strategist
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Robert Thompson (Research), Australia Macro Rates Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Are We There Yet?

It appears that markets have retraced some of their expectations for central bank action much closer to where speakers are guiding investors - in other words, we are trading much closer to what most people would consider 'fair value'. We sense a long bias in the fixed income markets and the question whether this is a sign of things to come offers itself. Meanwhile, FX markets are trading sideways and question about what can break the lethargy should be asked.

• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Gordon Scott (Desk Strategy), Euro Area Economist
• Elsa Lignos (Desk Strategy), Head of FX Strategy

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Not So Fast

Markets came into 2024 pricing in aggressive central bank cutting cycles. But continued resilience in growth and labor market data, along with some recent wobbles in the downward march of inflation has markets (and policymakers) pumping the brakes.

• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Michael Reid (Desk Strategy), US Economist
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Simon Deeley (Desk Strategy), Canada Rates Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Easing into Easing

The narrative from central banks has decidedly shifted from the risk of further tightening to signaling the next move will be lower. To paraphrase the message Powell gave us last week – we have confidence, and our confidence has increased that inflation will meet our objective, but we need more confidence before we start to cut. With central banks expecting a soft landing, they are gently easing into the easing cycle. When will central banks have enough confidence to pull the trigger & where will policy rates ultimately land?

• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Cathal Kennedy (Desk Strategy), Senior UK Economist
• Su-Lin Ong (Research), Chief Australia Economist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

A Delicate Balance

Focus continues on the timing and depth of central bank rate cuts as they try to engineer soft landings for economies across the globe. Central bank balance sheets and QT end timing in different jurisdictions have become increasingly topical as well. How do equity markets navigate this uncertain environment?

• Simon Deeley (Desk Strategy), Canada Rates Strategist
• Izaac Brook (Desk Strategy), US Rates Strategy Analyst
• Michael Reid (Desk Strategy), US Economist
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Lori Calvasina (Research), Head of U.S. Equity Strategy

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Too Good to be True!

Bond markets and equity markets have rallied sharply at the tail end of 2023 essentially based on a ‘soft landing’ scenario that sees inflation back at target as early as Q2 2024 whilst growth is weakening but not descending into a fully-fledged recession. This allows global central to cut rates – according to current market pricing – as early as March/April and will see up to 150bp of rate cuts before the year is out from the Fed and ECB respectively with other central banks hard on their heels. That being said, early in 2024, most parts of financial markets struggled to continue where 2023 left off – and we think for good reasons. Incoming data was not as weak as some might have hoped for – particularly in Europe – central bank speakers have been rowing back some of the dovish rhetoric and the usual and fully expected bond supply wave seems to leave some footprints in markets nevertheless. 10y bond yields have risen some 25-30bp since the low just after Christmas and credit as well as equity markets have given back some gains already.

• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Gordon Scott (Desk Strategy), Euro Area Economist
• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Andrea Marcheggiano (Desk Strategy), Director Capital Markets Advisory

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Let's Look Ahead

As 2023 comes to a close, we shift focus to what to expect in 2024, with year-ahead outlooks released for Europe, the US and Canada last week. Will macro data show clear direction towards reaching the 2% inflation target? How soon will central banks cut? These questions and more will be the focus of this edition.

• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Simon Deeley (Desk Strategy), Canada Rates Strategist
• Santosh Sateesh  (Trading), Head of Credit Derivatives Trading

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Riding the Chop

The market environment over the last two weeks may be best described as chop. Yields have been bouncing around day-to-day but market narratives seem to be settling with year-end in sight.

• Michael Reid (Desk Strategy), US Economist
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

U-Turn

The trends in markets since June - higher yields, lower equities, wider credit spreads - pulled a sharp U-turn over the past week. Lower bond yields have provided the impetus for a decent equity and credit rally. Listen to hear about where bond yields are headed from here and what it means for the equity market.

• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Michael Reid  (Desk Strategy), US Economist
• Lori Calvasina (Research), Head of U.S. Equity Strateg

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Finding Footing

Global yield curves have been moving higher and steeper despite new geopolitical risks and a dovish tilt in recent central bank rhetoric. Can bonds find some solid ground to stand on or do they still have further to fall?

• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Gordon Scott (Desk Strategy), Euro Area Economist
• Robert Thompson (Research), Macro Rates Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Higher, Wider, Steeper - What does the bond market sell-off tell us?

Bond markets keep pushing higher and curves steeper - but why? It appears that a combination of better than expected macro data and central banks communicating that rates will be held around present levels for longer than expected, is leading to a repricing. The risk is that this not only continues, but also takes hold of other markets, notably in the European time zone, where only a small amount of the rate cuts have been repriced as of yet. Positioning and developments in the Yen market are also making investors in Europe and the US jittery.

• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Izaac Brook (Desk Strategy), US Rates Strategy Analyst
• Simon Deeley (Desk Strategy), Canada Rates Strategist
• Robert Thompson (Research), Macro Rates Strategist
• Adam Cole (Desk Strategy), Chief Currency Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Bonds Unhinged

The main story in financial markets is fixed income and the relentless surge in yields. We explore why yields have been rising and curves steepening, whether this trend can continue, or what are the necessary ingredients for a turnaround.

• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Lori Calvasina (Research),Head of U.S. Equity Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Adam Cole (Desk Strategy), Chief Currency Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Last call

We have a number of central bank events on deck, with the ECB meeting this week, followed by the Fed and BoE next week. Overall, it seems like it’s coming up on closing time for global hiking cycles, but major central banks may be looking to get one last round of hiking in before the end.

• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Cathal Kennedy (Desk Strategy), Senior UK Economist
• Simon Deeley (Desk Strategy), Canada Rates Strategist
• Adam Cole (Desk Strategy), Chief Currency Strategist
• Su-Lin Ong (Research), Chief Australia Economist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Sunburnt Bonds

Ouch! Bonds have been burned in low liquidity summer markets, adding to the pain (total return losses) of the past two years. The move in bond yields is not unjustified based on fundamentals (now) but the level seems unsustainably high for the future evolution of macro. But can bonds rally in the face of a positioning overhang?

• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Alvin T. Tan  (Desk Strategy), Asia FX Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

How Long Will It Take?

With key central bank meetings due over the coming weeks at the same time, as economic sentiment data is weakening, the question of 'How Long Will It Take?' until rate hikes feed through into the real economy has become more prominent again lately. Meanwhile, the very same question is also asked in China, with the opposite effect in mind. In this episode, we preview the upcoming rate decisions and add our thoughts on the 'how long' question.

• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Simon Deeley  (Desk Strategy), Canada Rates Strategist
• Cathal Kennedy (Desk Strategy), Senior UK Economist
• Alvin T. Tan (Desk Strategy), Asia FX Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Defying Gravity

A number of global fixed-income markets have broken higher as central banks are still left to deal with tight labor markets and core inflation that is not falling fast enough for comfort. Can the sell-off continue, overcoming lingering fears of an economic slow-down or will yields quickly pull back down into old ranges?

• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Michael Reid (Desk Strategy), US Economist
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Lori Calvasina (Research), Head of U.S. Equity Strategy
• Su-Lin Ong (Research), Chief Australia Economist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Groundhog Day

Groundhog Day was a film about the same day repeating itself over and over, which has some parallels to what is happening in markets - policy rates higher, curves flattening, equities unfazed, and USD-CNY marching higher. Will this cycle continue or be short-circuited? That probably depends on what market or country you are talking about.

• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Lori Calvasina (Research), Head of U.S. Equity Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Alvin T. Tan (Desk Strategy), Asia FX Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Extreme Dependence

Hiking cycles are extending or re-starting later in 2023 than many expected for the BoC and Fed, with the terminal points heavily dependent on the evolution of data in the near-term. The BoE is similarly very data dependent, while the ECB looks set to extend its cycle further. Developed market economies have generally "outperformed" in the first half of the year, with expected weakness failing to materialize in hard data (so far).

• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Cathal Kennedy (Desk Strategy), Senior UK Economist
• Simon Deeley (Desk Strategy), Canada Rates Strategist
• Adam Cole (Desk Strategy), Chief Currency Strategist
• Adam Jones (Trading), Head of US Credit Algo Trading

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Sticky Core & Right Tails

Debt ceiling negotiations turned out to be a lot less dramatic than many had anticipated – still to come are congressional votes – but once the smoke clears we’re left facing down the back half of the year with many of the questions investors had in January not much closer to being answered – it looks like we have seen peak headline inflation but core is proving to be stickier than many had anticipated. That has led to a reassessment of the policy outlook for the back half of the year – we discuss updated views on the Fed, BoE, ECB, BoC and RBA. The other side of the story is a buoyant equity market, seemingly impervious to hikes getting priced out. That may be puzzling or frustrating for macro investors but we discuss how the under-owned right tail in equities may signal more pain to come.

• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Izaac Brook (Desk Strategy), US Rates Strategy Analyst
• Simon Deeley (Desk Strategy), Canada Rates Strategist
• Robert Thompson (Research), Macro Rates Strategist
• Elsa Lignos (Desk Strategy), Head of FX Strategy
• Amy Wu Silverman (Desk Strategy), Head of Equity Derivatives Strategy

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

To the Limit

Debt limit talks are ongoing in Washington, with financial markets already jittery on US banking concerns amid restrictive policy stances across many developed markets. Recent ECB speakers have generally noted they expect further hikes, while the BoE left the door open in its data dependent stance. BoC communication over the last month has emphasized that another hike is very possible and any talk of cuts is premature. How close "to the limit" will central banks take policy?

• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Cathal Kennedy (Desk Strategy), Senior UK Economist
• Simon Deeley (Desk Strategy), Canada Rates Strategist
• Adam Cole (Desk Strategy), Chief Currency Strategist
• Michael Tran (Research), Global Energy Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Too much, or not enough?

We have a number of major central banks meeting these next two weeks, including the RBA last night, the FOMC, ECB, later this week, and the BOE next week. While each of these institutions may be facing slightly different circumstances, it’s likely that all are nearing a decision point within the next meeting or two, where they have to decide whether to keep pushing against high inflation or trust that they have already delivered enough tightening to sustainably redirect inflation back to target levels. That debate may be framed by the tension between backward and forward looking frameworks. Or more specifically do you rely on backward looking data, which generally shows that inflation is still uncomfortably elevated and labor markets remain tight, or trust more forward looking, model driven forecasts that would suggest pent-up lagged effects and tightening in credit conditions due to banking stress, are already enough to pull inflation back to target?

• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Gerard Cassidy (Research), Head of U.S. Bank Equity Strategy & Large Cap Bank Analyst
• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Elsa Lignos (Desk Strategy), Head of FX Strategy
• Su-Lin Ong (Research), Chief Australia Economist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Ebbs and Flows

Rate volatility continues to be elevated, with policy rate expectations swinging around as determining the terminal rate and what happens afterwards is proving complicated. The unwinding of banking sector concerns accelerated into a more meaningful sell-off and rate hikes continued from most major central banks.

• Simon Deeley (Desk Strategy), Canada Rates Strategist
• Izaac Brook (Desk Strategy), US Rates Strategy Analyst
  
• Cathal Kennedy (Desk Strategy) - Senior UK Economist
  
• Alvin T. Tan (Desk Strategy) - Asia FX Strategist
  
• Lori Calvasina (Research) - Head of US Equity Strategy

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Seeking Calm!

The last week felt much calmer than anything experienced since the SVB and CS induced turmoil over the prior weeks. Volatility is much reduced, credit spreads are tighter and primary markets are re-opening again. Can this last and what are the lingering implications for markets and the economy from the March volatility?

• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Sean Taor (Debt Capital Markets), Head of European DCM and Syndicate
• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Adam Cole (Desk Strategy), Chief Currency Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Humpty Dumpty

It might be an overly simplistic argument, but in hindsight it should not be surprising that aggressive Fed rate hikes broke something in financial markets. Policy actions to ring fence the problems have been fast and furious but can all the kings horses and all the king's men, put dislocated markets back together again?

• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Nicola Dransfield (Desk Strategy), European financials credit strategist
• Adam Jones (Trading), Head of US Credit Algo Trading
• Tom Porcelli (Research), Chief US Economist
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Adam Cole (Desk Strategy), Chief Currency Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Stretch Run

As hockey and basketball enter the last weeks of the regular season, central banks themselves are approaching the end of their hiking cycles. There is significant divergence among global central banks, ranging from a conditional pause from the BoC in January (which we expect to be reiterated this week) to ongoing tightening messages from the ECB and the Fed.

• Cathal Kennedy (Desk Strategy), Senior UK Economist
• Su-Lin Ong (Research), Chief Australia Economist
• Simon Deeley (Desk Strategy), Canada Rates Strategist
  
• Elsa Lignos (Desk Strategy), Head of FX Strategy
  
• Adam Jones (Trading), Head of US Credit Algo Trading

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Fooled by lags?

Are markets being fooled by lags? Not unusual for this point in the cycle, some data is coming stronger and some weaker. Recently the market has taken its cue from strong labor market data which might be a mistake. It has only been 6-8 months since large-scale rate hikes started and with monetary policy lags being anywhere from 12-24 months, there is a possibility that the bond market is underestimating the timing and magnitude of the growth downturn. But the patterns are not uniform across countries and this episode examines some of the nuances.

• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Robert Hogue (Research), Assistant Chief Economist
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Adam Cole (Desk Strategy), Chief Currency Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

What Now?

The US payroll report sent shock waves through the fixed income market. Market pricing shifted aggressively - terminal pricing is now the highest in the cycle and finally consistent with the FOMC dots. Contagion has also spread to other markets. What now? Can the Fed keep hiking, can the BoC stay on hold, how much further will the BoE, ECB, or RBA go? And what are the implications for equities and FX? This episode delves into these topics.

• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Blake Gwinn (Desk Strategy), Head of US Rates Strategist
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Elsa Lignos (Desk Strategy), Head of FX Strategy
• Lori Calvasina (Research), Head of U.S. Equity Strategy
• Su-Lin Ong (Research), Chief Australia Economist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Emerging Divergence?

Recent months have seen widespread hikes across most G10 central banks, but the potential for divergence is high in the coming months as some central banks are approaching the end of their hiking cycle.

• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Adam Cole (Desk Strategy), Chief Currency Strategist
• Simon Deeley (Desk Strategy), Canada Rates Strategist
• Amy Wu Silverman (Desk Strategy), Head of Equity Derivatives Strategy
• Su-Lin Ong  (Research), Chief Australia Economist
• Robert Thompson (Research), Macro Rates Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Can't, Won't, Don't Stop

While upcoming policy increments and terminal values for various countries are highly debatable, Can't, Won't, Don't Stop seems like an appropriate characterization of current near term central bank policy. To reiterate our message from late last year - 2023 could turn out to be as challenging as 2022 but for different reasons. 2022 was how high policy rates would go. In 2023 market expectations should become fractured into the hike, hold, cut camps.

• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Blake Gwinn (Desk Strategy), Head of US Rates Strategist
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Elsa Lignos (Desk Strategy), Head of FX Strategy
• Michael Tran (Research), Global Energy Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Final Countdown

BoC/Fed/BoE/ECB are all on tap over the coming week. How high rates will go, whether there will be a quick u-turn to rate cuts in 2023 and by how much, is a central theme for markets that will influence not only yield levels and curve shapes, but also important for FX and broader risk assets.

• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Simon Deeley (Desk Strategy), Canada Rates Strategist
• Blake Gwinn (Desk Strategy), Head of US Rates Strategist
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Elsa Lignos (Desk Strategy), Head of FX Strategy

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

It's Complicated

• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Adam Cole (Desk Strategy), Chief Currency Strategist
• Amy Wu Silverman (Desk Strategy), Head of Equity Derivatives Strategy

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Where's Terminal?

All year market pricing for terminal rates in most countries has been a moving target and one directional – higher. Last week the Fed signaled a slower pace of rate hikes but a terminal value that was higher than their previous forecast.

• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Simon Deeley (Desk Strategy), Canada Rates Strategist
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Daria Parkhomenko (Desk Strategy), Head of FX Strategy
• Lori Calvasina (Research), Head of U.S. Equity Strategy

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Let's Get Restrictive

Most central banks are at a maturing stage of the hiking cycle, putting terminal policy rates firmly in focus at upcoming meetings both sides of the Atlantic.

• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Elsa Lignos (Desk Strategy), Head of FX Strategy
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Simon Deeley (Desk Strategy), Canada Rates Strategist
• Michael Tran (Research), Global Energy Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

A Gilt Edged Crisis

A made in UK fiscal crisis has led to sharp rises in gilt yields, with the BoE's buyer of last resort interventions disappointing those expecting more QE-type operations. The yield rises have permeated to Treasuries and other developed markets, with important cross-asset implications.

• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Blake Gwinn(Desk Strategy), Head of US Rates Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Daniel Rico (Desk Strategy), Latin America FX Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Fault Lines

Fiscal policy has cracked the UK bond market, opened fissures in the Pound, causing ruptures in other bond markets and by extension risk and cyclically sensitive assets. Whether the fault lines in bond markets and risk assets turn into a full blown earthquake remains to be seen, but what is clear is that the high volatility should remain in place for the rest of the year. Stay tuned for our Macro Minutes series to hear from RBC experts on these developments.

• Cathal Kennedy (Desk Strategy), UK Economist
• Adam Cole (Desk Strategy), Chief Currency Strategist
• Simon Deeley (Desk Strategy), Canada Rates Strategist
• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Lori Calvasina (Research), Head of U.S. Equity Strategy

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Full Throttle

Central banks are going full throttle to fight inflation by delivering outsized rate increases over multiple meetings. Their job...

• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Gordon Scott (Research), Australia Economics & Fixed Income
• Adam Cole (Desk Strategy), Chief Currency Strategist
• Adam Jones (Trading), Head of US Credit Algo Trading

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

The Bears are Back in Town

Many G10 central banks have moved policy rates to a neutral policy setting and are set to send them into restrictive territory with...

• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Simon Deeley (Desk Strategy), Canada Rates Strategist
• Elsa Lignos (Desk Strategy), Head of FX Strategy
• Michael Tran (Research), Global Energy Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Yo-Yo Yields

The bond market overreacted to inflation fears in June and yields overshot on the topside. July was a complete reversal (and some) as...

• Jason Daw (Desk Strategy), Head of North America Rates Strategy
• Simon Deeley (Desk Strategy), Canada Rates Strategist
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Adam Cole (Desk Strategy), Chief Currency Strategist
• Daria Parkhomenko (Desk Strategy), FX Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

The Need For Speed

Central banks are full throttle on rate increases in a throwback to the early 1980's inflation fighting era. The ultimate end game of...

• Tom Porcelli (Research), Chief US Economist
• Blake Gwinn (Desk Startegy), Head of US Rates Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Jason Daw (Desk strategy), Head of North America Rates Strategy
• Elsa Lignos (Desk Strategy), Head of FX Strategy
• Lori Calvasina (Research), Head of U.S. Equity Strategy

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Dog Days of Summer

The weather isn't the only thing heating up; North American central banks are expected to deliver large rate increases in July and...

• Jason Daw (Desk strategy), Head of North America Rates Strategy
• Blake Gwinn (Desk Startegy), Head of US Rates Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Adam Cole (Desk Strategy), Chief Currency Strategist
• Adam Jones (Trading), Head of US Credit Algo Trading

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Too Soon To Focus On Growth Risks?

We continue in an ebb and flow between market focus on inflation and growth risks, with the latter taking more prominence in recent...

• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Simon Deeley (Desk Strategy), Canada Rates Strategy
• Daniel Rico (Desk Strategy), Latin America FX Strategist
• Lori Calvasina (Research), Head of U.S Equity Strategy
• Tom Porcelli (Research), Chief US Economist
• Michael Tran (Research), Global Energy Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Aggressive Tightening And Its Impacts

After markets started to shift attention towards growth risks, hawkish central banks and still elevated inflation have re-focused...

• Simon Deeley (Desk Strategy), Canada Rates Strategy
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Amy Wu Silverman (Desk Strategy), Head of Equity Derivatives Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Elsa Lignos (Desk Strategy), Head of FX Strategy
• Robert Thompson (Research), Macro Rates Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Abrupt Reversals – Can They Be Sustained?

Markets have sharply reserved course. Is this the start of a new trend, a consolidation phase, or just a pause before past trends...

• Jason Daw (Desk Strategy), Head of North American Rates Strategy
• Adam Cole (Desk Strategy), Chief Currency Strategist
• Lori Calvasina (Research), Head of U.S. Equity Strategy
• Adam Jones (Trading), Head of US Credit Algo Trading
• George Davis (Desk Strategy), Chief Technical Strategist, FICC

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Shifting Sands in Macro & Markets

Inflation dominated the narrative for the past few months but growth risks are gaining importance and there are subtle shifts...

• Jason Daw (Desk Strategy), Head of North American Rates Strategy
• Simon Deeley (Desk Strategy), Canada Rates Strategy
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Adam Cole (Desk Strategy), Chief Currency Strategist
• Amy Wu Silverman (Desk Strategy), Head of Equity Derivatives Strategy
• Michael Tran (Research), Global Energy Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Central Banks Strike Back

There are clear parallels between now and the early 1980's (rates vol, inflation uncertainty, aggressive central bank tightening)...

• Jason Daw (Desk Strategy), Head of North American Rates Strategy
• Tom Porcelli (Research), Chief US Economist
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Su-Lin Ong (Research), Chief AU Economist
• Daria Parkhomenko (Trading), FX Strategist
• Adam Cole (Trading), Head of US Credit Algo Trading

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Curve Chaos: Bond, Equity, FX Implications

Bond markets have gone wild - the sell-off has intensified and the new dimension of the move higher in rates has been dramatic curve...

• Jason Daw (Desk Strategy), Head of North American Rates Strategy
• Tom Porcelli (Research), Chief US Economist
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Adam Cole (Desk Strategy), Chief Currency Strategist
• Lori Calvasina (Research), Head of U.S. Equity Strategy
• Amy Wu Silverman (Desk Strategy), Head of Equity Derivatives Strategy

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Central Banks – The Road Ahead

Global central banks continue to shift more hawkish, but can lofty market pricing for tightening be realized? What are the risks and...

• Tom Porcelli (Research), Chief US Economist
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Elsa Lignos (Desk Strategy), Head of FX Strategy
• Simon Deeley (Desk Strategy), Canada Rates Strategist
• Jason Daw (Desk Strategy), Head of North American Rates Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Su-Lin Ong (Research), Chief AU Economist
• Michael Tran (Research), Global Energy Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Up, Up and Away

A hawkish Fed added fuel to the bond market sell off, which is having repercussions across global asset markets. In this episode, RBC...

• Jason Daw (Desk Strategy), Head of North American Rates Strategy
• Tom Porcelli (Research), Chief US Economist
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Peter Schaffrik (Desk Strategy), Head of UK/European Rates & Economics
• Simon Deeley (Desk Strategy), Canada Rates Strategist
• Adam Cole (Desk Strategy), Chief Currency Strategist
• Robert Thomson (Desk Strategy), Macro Rates Strategist
• Jason Mandel (Desk Strategy), Head of Leveraged Finance Desk Strategy

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts

Russia-Ukraine Risk Premium

The Russian invasion of Ukraine is having a pervasive impact on global economies and financial markets. In this episode, RBC experts...

• Jason Daw (Desk Strategy), Head of North American Rates Strategy
• Helima Croft (Research), Head of Commodity Strategy & MENA Research
• Peter Schaffrik (Research), Head of UK/European Rates & Economics
• Elsa Lignos (Desk Strategy), Head of FX Strategy
• Tom Porcelli (Research), Chief US Economist
• Blake Gwinn (Desk Strategy), Head of US Rates Strategy
• Simon Deeley (Desk Strategy), Canada Rates Strategist

* Research Analyst opinions are their published views, independent of those expressed by Desk Analysts