Daily Market Color

Equities Decline, Treasuries Rally Marginally on China Data Ahead of FOMC

Stocks declined while Treasuries rallied marginally on light volume as investors digested largely disappointing Chinese data ahead of this week’s FOMC meeting.  Chinese industrial production and urban fixed asset investment (essentially infrastructure spending) both missed economist estimates, casting renewed doubts over China’s ability to reach its 7% growth target for the first time since the financial crisis.  Chinese IP grew 6.1% YoY vs. Wall Street estimates of 6.6%, while fixed asset investment slowed to 10.9% through August, the slowest pace in almost 15 years.  Retail sales, however, surprised to the upside, increasing by 10.8% from levels of a year earlier.  Volatility is likely to remain elevated so long as the Chinese economy struggles to find its footing, despite Beijing having plenty of tools available to stimulate growth.

Data in the US is light today, but it picks up significantly over the next few days leading up to Thursday’s Fed announcement.  Retail sales and CPI headline, but neither is likely to play a large role in influencing policy.  Recent US data has painted a mixed picture, and a new Wall Street Journal survey revealed that a majority of private economists now don’t expect the Fed to hike interest rates this week.  Traders also appear bearish on a rate hike, with only a 28% chance currently being priced in, down from 48% prior to China’s currency devaluation in July.

Ironically, a Bloomberg article that made the rounds today makes the case for a rate hike this week based on comments made by Fed Vice Chair Fischer back in 2014.  In June 2014, right before becoming the Fed’s second highest ranked official, Fischer said “Don’t overestimate the benefits of waiting for the situation to clarify”.  The reason being is there is always some layer of uncertainty in making a decision of that magnitude, and if you wait until the decision seems obvious, then you’ve waited too long.  It will be interesting to see if Fischer still feels that way and if he can convince other more dovish members of the FOMC.  

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