Daily Market Color

Disappointing Economic Data Dampens Growth Outlook Spurring Risk Off Trade

Stocks declined while Treasuries and swap rates rallied across the curve after a variety of economic reports pointed to a cooling global economy.  The bid for safer assets started overnight after Japanese producer prices and consumer confidence both missed estimates and Chinese inflationary pressures cooled.  China’s National Bureau of Statistics said that consumer prices rose 1.6% (vs 1.8%e) in September YoY, down from the 2% rise in August, and well below Beijing’s 3% target.  The weak inflation data reflects a slowdown in China’s economy, and could pave the way for further stimulus from the PBoC.  Monday will be a huge day for Chinese data featuring the release of industrial production, retail sales, urban fixed asset investment, and Q3 GDP.

Data in the US further clouded the domestic economic picture, causing the market-implied probability of a Fed rate increase in 2015 to fall to a new low.  Retail sales barely rose in September and producer prices experienced their biggest drop in eight years, suggesting the economy may be losing momentum in the face of international headwinds.  Comments from the Fed’s Tarullo also weighed on bets for a US rate increase in 2015.  Tarullo said he wants to see “tangible evidence” of inflation picking up and approaching the Fed’s 2% target before hiking rates, which is unlikely in 2015.  Tarullo’s stance goes against Fed Chair Yellen, Vice Chair Fischer, and NY Fed President Dudley, who all recently said that liftoff is appropriate in 2015 if the economy grows as expected.

Aside from the data, the market will focus on corporate earnings, T-bill auctions, and the release of the Fed’s beige book at 2pm ET.  There are no scheduled Fed speakers.

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