Expect BOE to cut from June: Pictet's Chatelain

For more on all this, we’re joined by Lauren Chalan, the fixed income strategist at Bank Pichte and Bloomberg’s Executive Editor for Asia Markets, Paul Dobson. So thank you both for joining us. Lauren, what’s your take on first of all, are we going to have a lot of volatility with Fed expectations with any real the data point and what does that mean for Treasuries? Good morning. Thank you for having me. So yes, indeed we expect a bit more volatility ahead. However, what was key from Powell speech last week was the asymmetry in terms of not very likely that they’re going to hike this year. So it probably puts a cap on the long term treasury yields. And now we’ll watch of course what happened with the US election that could build a bit of term premium. But so far we would really expect treasury yields to hover on 4.5 or maybe heads lower if we have more confirming data that inflation is softening in the US So what’s your highest conviction market view right now? So really now big theme is cash from cash to duration. So we really see the rise in long term years. We’ve seen in the recent months as a good entry point to really locking these elevated yields. So we’re really trying to buy longer the date bonds both on credit but also on sovereign and we have recently moved overweight on gilts actually. And Paul, I mean a lot of the focus of course has been on yen. We heard from Janet Yellen and kind of what she was saying that, you know, she has no reason, I can’t remember exact words. But she said, look, it’s not a given that certainly the Bank of Japan intervened or they should have maybe given them a warning. But Paul, what’s your take on on the week ahead? We have a little bit less data and it’s a little bit maybe less things to surprise the markets, hoping for a little bit more calm and quiet. That’s right. And we saw measured of implied volatility coming off at the back end of last week as well. I think on the yen, you know Yellen’s comments weren’t too strong, but she did give that impression that you know, intervention in currency markets shouldn’t be a regular occurrence, should be a kind of, you know, something that’s safe for extremes. But I think the the fact that Japan’s finance minister and the South Korean counterpart were in Washington not recently in talking about it with Yellen and she gave some brought to their arguments talking about the weakness of their currencies that that was already kind of greenish light from the US at that point to intervene if they saw the need. Now we we don’t know for certain that that’s what happened, but we have some pretty strong evidence pointing in that direction. I think that, you know, Yellen won’t mind that too much. A little bit more of a soft dollar is probably helpful for the US as well, but she won’t want us to get into that situation. Well, we’re constantly seeing FX intervention coming from various different forces because that causes more market instability, arcade uncertainty and also starts to you know skew the real signals that the market is trying to give as well. So I think a much better and more sustainable solution would be if we could get to a point where yes, the Fed could cut studying and yes, the Bank of Japan could continue to raise interest rates and narrow that gap a little bit. So taking some of the pressure off the yen that way, yeah and to Lorelei’s good point also I know you were talking about you know from from cash to duration, Lorraine, where do you see are there, are there regions that look more attractive at the moment or or you do look at it differently. So yes, as I was mentioning we’ve moved recently overweight on Gills. Our expectation there is that the Bank of England is likely to start its rate cutting cycle in June and we see that the market pricing is a bit on the downside compared to our expectation of four rate cuts, the market sees a bit more than two. So we would expect already their years falling with a more dovish BOE than what the market has in mind. And also the fact that inflation expectation has still very elevated in the UK and we have more and more evidence that we could see inflation softening and going into the 2% direction that the BOE has in mind given we had quite a lot of earnings. What’s your take on corporate bonds? And again is there is there a play right now after earnings. So the earnings season comforted us with the fact that we still very much like investment grade credit. So we are overweight both in US and Europe on that end and definitely what we see that spread a tight, but that’s basically OK given the earnings season we’ve had. But we really need growth to stay comfortable I would say because in as we know in a recession we could see a spread widening. So we very much looking at gross data and earnings season as well. Thank you, Laura Lee and Paul. We also seem to be really the ECB actually got this right in terms of telegraphing that there is probably a cut in June. And then we heard from Philip Lane this morning speaking to some of the local newspapers or El Confidencial actually in Spain saying that he’s also confident that the trend for inflation is going downwards. Ah, and that’s, that’s the big bet. And I guess that’s what Lohalin is also seeing when she’s talking about our favoring long duration trades. I think it and it makes a fair deal of sense, particularly if you look at the performance of the market so far this year where you’ve seen one to three-year government bonds at least with a tiny positive return. But you look at the back end, the 25 years plus steep losses -5% or more even with the recovery that we saw at the back end of last week. So that shows you just from the start of this year, there’s plenty of ground already for bonds to make up. And if we do start to see that inflationary pressure ebb, if we start to see a little bit of a let up in commodities markets as well. And we see signs that the central banks are going to be able to ease without inflation kind of escaping and slipping back out again of the bottle when they feel that they’ve got it under control, then that should all bode well for those longer dated bonds, particularly on the corporate side where you can get that yield pick up as well. So across Europe, if you’re looking in the UK or in the US that you know kind of like seems to be where there’s that opportunity if all of those other things hold in place. And going back to actually what we’re expecting a little bit later in the week, we have big auctions in the USI think it’s a total of $67 billion of auctions at 10 or 30 year treasury securities. I mean do you think those longer dated, I guess debt will really test demand because some investors won’t, won’t want part of it. So I would say what was important from the treasury announcement we had last week was their commitment not to increase the size of the auction on the nominal coupon. And so I would say that for the several quarters ahead. So I would say that the risk of surprise in terms of auction on the market as we had last autumn is very low and so the market knows that this auction are coming. But as I was mentioning yields level are quite attractive 4.5 on the 10 year treasury and I would say that with the good unemployment report we have had on Friday probably we’ll meet the demand there. Wonderful. Thank you both for joining us. Lohlin Shatland There are fixed income strategist at Won’t Pick Day and Bloomberg’s very own Paul adopts and now coming.