Daily Agenda: Markets’ Pullback Reflects Consensus on Fed

Chinese inflation data weaker than expected; Volkswagen downgraded by Fitch; IEA expects oil prices to remain below $80 for years to come.


Treasury futures markets recovered some lost ground in trading early Tuesday despite both a large 10-year note auction scheduled for later today and near-consensus that the Federal Reserve rate liftoff will commence in December. This follows a trading session on Monday that saw selling pressures across bond, equity and commodities markets. With stocks still trading near all-time highs and both volatility and investor-sentiment indices reflecting no signals of panic, the current price action increasingly appears to signal that Federal Reserve policy has been largely priced into market expectations.

Chinese inflation data weaker than forecast. October consumer-price-index figures released by the National Bureau of Statistics Tuesday included a rise of 1.3 percent year-over-year for the headline measure, the slowest pace in five months and below-consensus estimates. This sluggish price growth continues despite six rate cuts by the People’s Bank of China over the trailing 12 months. Meanwhile, headline producer prices for the month declined for the 43rd consecutive time, with a drop of nearly 6 percent versus October 2014, as raw-material costs continue to suffer from weaker demand.

Volkswagen bonds downgraded. Credit-ratings agency Fitch today lowered the long-term debt issued by troubled automotive giant Volkswagen by two levels, from A to BBB+. In its report, Fitch noted that the scope of the emissions fraud calls both the firm’s corporate governance and culture into question.

IEA forecasts slow rise for oil. The International Energy Agency released the annual World Energy Outlook report Tuesday, forecasting that oil prices will remain below $80 per barrel until 2020 as cooling demand growth and surplus supply weigh on markets. Separately, the report concludes that international agreements over climate change remain insufficient to achieve targeted temperature thresholds.

Portuguese vote likely to signal regime change. The current government of Portugal appears likely to be ousted with a no-confidence vote in parliament today, leaving a left-wing coalition positioned for power. Two of the three Eurosceptic parties in the new coalition, the Left Bloc and the Communists, are considered extremely left-leaning.

Portfolio Perspective: Supply, not Fed Fears, Driving Rising Yields

While investors are naturally discussing the outlook for Fed policy in great detail, Monday’s fixed-income markets were all about supply. Many dealers report a wall of money looking to invest in Treasuries given the jump in yields during recent weeks. But the presence of the corporate and government supply and the steadily eroding nature of the price action has caused many investors to be patient in their buying.

With the market now pricing in a 70-75 percent probability of a Fed rate hike next month, it is important to note that a Barclays survey of 651 global investors last week found that these institutions are more concerned about growth in China than any risks from Fed rate hikes. Only 6 percent sees Fed normalization as the main risk for markets over the next 12 months, compared with 36 percent whose main worry is China. The Investors acknowledge that Fed liftoff could be a negative for markets in the near term, but only 10 percent think it will have long-lasting effects on risky assets. Furthermore, 20 percent believe that the first Fed hike will actually be a positive for risky assets.

Karl Haeling is a vice president at Landesbank Baden-Württemberg in New York.