After a week that left equity investors globally rattled, U.S. bond markets will pause for a long holiday weekend. Despite the abbreviated week for some American investors, a calendar bulging with earnings releases and fresh macroeconomic indicators means that any respite will be short-lived as market risk narratives are recalibrated.
Monday, October 13: With the bond market closed for the Columbus Day holiday in the U.S., the macroeconomic data with the greatest potential to impact market sentiment are trade and new loan data from China and wholesale price index levels in Germany. Chinese exports are forecast to rebound in September on a year-over-year basis but not enough to prevent the trade surplus from a contraction for the month. September new loan data will also be of interest as analysts look for recent People’s Bank of China liquidity measures to trickle into the broad economy. Meanwhile, analysts are expecting wholesale prices in Germany to be up marginally in September over July but down versus the same month in 2013.
Tuesday, October 14: In Japan, corporate goods price data for September, scheduled for release on Tuesday, is forecast to contract for the month as the Bank of Japan’s massive efforts to stoke inflation stumble. In Europe, consumer inflation data for September will be released in France, Italy and the U.K. with expectations for month-over-month contractions for the Continental economies, while prices are expected to rise on the other side of the channel as the British economy continues to display strength relative to its neighbors. Euro zone industrial production data for August is forecast to contract significantly for the month as regional demand remained muted in late summer. ZEW sentiment survey data will be released in Germany on Tuesday as well, providing insight into the assessment of the current situation in the E.U.’s largest economy. U.S. large-cap equities reporting third quarter results include Citigroup, Johnson & Johnson, JPMorgan Chase and Wells Fargo & Co. before the market opens and CSX Corp. after the close.
Wednesday, October 15: Consumer and producer inflation data for September will be released in China, with economists predicting a sequential contraction in year-over-year prices at the cash register and an outright contraction in costs at the factory gate that exceeds the drop in August. Abenomics will bear another test on Wednesday, as industrial production data for August is slated for release. Several critical European data points will emerge as September CPI index levels will be announced in Germany, while August employment data is on deck in the U.K. A slew of fresh indicators will be released in the U.S. on Wednesday including producer prices and retails sales for September. Critically, the Federal Reserve’s Beige Book will be released on Wednesday, providing some insight into the information that the Federal Open Market Committee has to work with as it consider its next policy move. U.S. earnings season grinds on that day with BlackRock, Charles Schwab Corp. and PNC Financial Services Group slated to release numbers prior to the market open and American Express and Kinder Morgan announcing after trading ends.
Thursday, October 16: With so much concern about the prospect of deflation in Europe, the September euro zone CPI release will be closely monitored by market participants attempting to anticipate European Central Bank policy. In the U.S., Energy Information Administration oil stockpile data will be released a day late due to the short holiday week. As a result of the precipitous slide in oil prices in recent sessions, there will be increased interest in any signal that supply measures remain robust. Industrial production data for September will also be released in the U.S. on Thursday with consensus forecasts for a marginal uptick in activity. As always, initial jobless claims will be a focus of market narratives. Blackstone Group and Goldman Sachs Group will join the host of financial firms releasing quarterly earning this week with announcements scheduled before market hours, while tech giant Google will be sharing its latest results after the market closes.
Friday, October 17: The current employment situation will likely figure heavily in remarks by Federal Reserve chair Janet Yellen, who is scheduled to speak at the Federal Reserve Bank of Boston Economic Conference entitled “Inequality of Economic Opportunity.” Separately, September housing starts and University of Michigan consumer sentiment measures will also be released on a day that sees little economic data on deck in other primary economies. Among corporate earnings announcements that day, Morgan Stanley, which recently made headlines with generous bonuses for investment bankers, and Bank of New York Mellon Corp. will be closely watched by market participants.
Portfolio Perspective: Overreaction — Rajiv Setia, Barclays
The rates market rallied this week in response to the further underperformance of risk assets and the September FOMC minutes. Economic data were mixed: While job openings and initial claims surprised to the upside, hiring rates fell. Economic data overseas were weaker than expected, particularly in Germany, with lower-than-expected factory orders and industrial production. The U.S. dollar weakened a touch from the highs and oil prices continued to fall. Market expectations of the hiking cycle have now been pushed back roughly three months from before the September FOMC meeting, with the federal funds rate expected to cross 2 percent in mid-2017 .
The highlight of the week was the release of the September FOMC meeting minutes, which were perceived as very dovish — much more so than appropriate, in our view. The market reacted to the mention of worries about the strengthening of the dollar and weak growth prospects globally. However, only some participants mentioned this risk and only a couple were worried about the disinflationary effects. Importantly, the bulk of the dollar appreciation had already taken place prior to the Fed meeting in September and was presumably factored into the Fed’s updated economic forecasts. In September, the Fed marked down its growth forecasts for 2015–16 very slightly, while actually lowering its unemployment rate forecasts. Fed chair Janet Yellen did not highlight concerns about the dollar at the press conference, and earlier this week, New York Fed president Bill Dudley noted that even with the current backdrop and risk assets starting to underperform, it was reasonable to expect the hiking cycle to start in mid-2015. Fed vice chair Stanley Fischer also noted that the exchange rate was one of the factors and that expectations of hiking by mid-2015 seem right.
In our view, it will take a far sharper drop in risk assets to cause the Fed to deviate from a mid-2015 baseline for the start of the hiking cycle. Overall, in the context of a strong payroll report, where labor market slack fell faster than expected, domestic developments should dominate spillover effects from overseas; financial conditions also remain easy. Hence, we believe the market has overreacted to the minutes and current yield levels are no longer consistent with the policy outlook.
Rajiv Setia is the head of U.S. interest-rate research at Barclays in New York.