Deflationary Pressures in China Weigh on Risk Assets

Stocks fell while Treasuries and swaps rallied marginally as weak Chinese inflation data renewed concerns for the world’s second largest economy.  Today’s report showed consumer prices rose just 1.3% YoY, missing expectations for a 1.5% increase, and marking the slowest annual expansion since May.  Additionally, producer prices declined for the 43rd month in a row.  The 5.9% fall was unchanged from September, but slightly missed expectations.  The data points to clear deflationary pressures, which should encourage the People’s Bank of China to look at further stimulus measures.  The PBoC has evenly staggered interest rate cuts 6 times since November 2014, so December would look like the most likely time for further easing based on the current pattern.

Fed speculation also remained an overarching theme.  Jeff Gundlach, famed bond investor and head of DoubleLine Capital, said he believes the likelihood of a December rate hike is only 50-50 despite futures markets indicating a probability closer to 70%.  Gundlach described Friday’s payrolls report as “pretty good in a number of ways”, but pointed out the hypocrisy in commentators saying the Fed is “behind the curve” because of one pop in average-hourly earnings.  He also said the dollar bears watching leading up to the December meeting because “If the dollar gets stronger, we may see further volatility in markets, which might get the Fed nervous”.

US data was light today, but picks up later this week, headlined by the JOLTS job openings report and retail sales.  The market gets a $24 billion 10-year auction this afternoon and Chicago Fed President Evans speaks on government debt management after the close. 

The US bond market will be closed tomorrow in honor of the Veteran’s Day holiday.