An issue facing global central bankers is, despite massive easing programs, inflation — or perhaps more astutely, the lack thereof. This limited price growth presents a problem for investors left pondering how to position themselves in fixed-income markets that have scant expectation for rising yields anytime soon. In a report released this morning, Société Générale strategist Albert Edwards wrote, “anticipated inflation in the U.S. may be starting to contract further.” He notes that, while November’s Michigan Consumer Confidence survey saw sentiment rise to a seven-year high, “less noticed was what happened to inflation expectations which slumped on all measures. This coincides with market measures of ten-year inflation expectations also sliding sharply this week to 1.85 percent; below the lows seen during the past month’s turbulence and the lowest since October 2011.” For investors and policymakers alike, the specter of deflation is at the forefront.
Japanese exports rise. October shipments abroad rose by nearly 10 percent versus the same month last year reaching the highest level in over five years, according to Japanese Finance Ministry data released today. For supporters of the Bank of Japan’s quantitative easing program, this provides a measure of confirmation that a weaker yen is helping export industries regain competitiveness. The nation still registered its 28th consecutive trade deficit, however, as mothballed nuclear capacity drives higher demand for fuel imports despite lower oil costs.
China registers sluggish factory activity. Preliminary China HSBC purchasing managers’ index levels (PMI) for November released this morning showed factory activity levels hitting 50, a six-month low figure. After the softer-than-forecast fixed-asset investment numbers last week, this fresh data point contributes to the trend of weakening industrial activity despite targeted easing programs by the People’s Bank of China.
Europe shows grim PMI numbers. Markit preliminary November PMI data released today for the primary euro zone economies registered below consensus forecasts, adding to concerns about the region’s growth prospects. Aggregate PMI for the euro region fell sharply to 51.4 from 52.1 in October while German specific manufacturing declined to 52.1, down from 53.9 the previous month.
Retail sales jump in the U.K. Figures from the U.K. Office for National Statistics released today indicated a rush of consumer activity in October, with total sales up almost 1 percent for the month, driven largely by spending on household goods. Despite resilience across multiple growth measures, economists’ consensus forecasts are for a marginal slowdown in GDP for the final quarter of the year.
U.S. unemployment claims and inflation numbers to be released. U.S. primary indicators on deck include existing home sales for October, initial jobless claims and consumer inflation figures. Consensus forecasts call for prices at the cash register to contract marginally for the month of October with a marginal contraction in the pace of home sales.
Portfolio Perspective: Expect Rates to Rise Modestly Next Year — Rajiv Setia, Barclays
We at Barclays expect rates to be higher in the major economies by the end of 2015. Given the global backdrop, however, the timing of the sell-off is difficult to pin down. Over this time frame we expect an increase in ten-year Treasury yields to about 2.85 percent, ten-year Gilts to 2.75 percent and ten-year Bunds to 1.1 percent. Overall, this simply reflects the effect of the hiking cycle coming closer in the U.S. and U.K. rather than a more aggressive path. Tactically, going into year-end, we remain neutral on duration in all major developed economies.
In our base case scenario, it will be difficult for the market to sell off too much. As markets account for normalization, it would not be a surprise to see risk assets underperform at first, as was the case in October, keeping term premiums suppressed. With the European Central Bank and the Bank of Japan still easing aggressively, any strengthening of the U.S. dollar may also tighten financial conditions in the U.S., allowing the Federal Reserve the luxury of hiking rates at a fairly measured pace versus prior cycles.
Rajiv Setia is head of U.S. interest-rate research at Barclays in New York.
