Fed Hike Speculation Sparks Selloff in Both Equities and Bonds

Stocks, Treasuries and swaps were all under pressure to start the week off the back of continued fallout from Friday’s stellar nonfarm payrolls report.  The dollar resumed its recent rally and trading in Fed Funds continued to imply higher odds of a rate hike at the Fed’s December meeting.  Meanwhile, headlines overnight included weak Chinese trade data and an OECD report forecasting a global slowdown.  China’s exports declined 6.9%, the fourth consecutive monthly drop, while imports fell 18.8%, leaving a record high trade surplus.  The figures missed estimates by a large margin and will likely reinvigorate calls for additional stimulus from the People’s Bank of China.  The Organization for Economic Cooperation and Development cut its 2015 growth forecast despite encouraging the Fed to raise rates this year.  Global GDP is now forecast to grow by 2.9%, down from 3% previously estimated in September.  The OECD’s chief economist described China as “at the heart of” disappointing global trade that has fallen to levels close to those “associated with global recession”.

While markets are acting as if a December rate hike is a done deal, one voting member of the Fed still wants to see more positive data between now and then.  Over the weekend, San Francisco Fed President Williams said that the next step is for the Fed to raise rates, but that the data will decide timing.  Williams would like to see higher rates sooner rather than later because it would allow for a more gradual normalization process as opposed to a steeper reactionary approach, but due to developments abroad, inflation remains lower than he would like.  Williams acknowledged that at least one measure of full employment has been reached and that the decision to keep rates unchanged in October was a difficult one.  It sounds like Williams is on board with a hike so long as the data holds up between now and the December meeting, but general sentiment is it would take a significant setback for the Fed to change course after Friday’s payrolls report.