Good evening,
Global Jitters Drive Flight-to-Quality
by Craig Dismuke
Small business optimism for the month of September fell more-than-expected, dropping from 96.1 to 95.3. Some of the key indicators within the survey of the labor market were lower. The net respondents saying jobs are hard to fill fell 5 points while sales expectations dropped 2 points and hiring expectations fell 1 point. This is the only economic release scheduled today.
After yesterday’s stock sell-off, bonds are opening this morning with yields sharply lower. The 10-year Treasury yield has dropped from 2.28% Friday to 2.18% this morning while the 2-year yield is now down to 0.36%. If you happened to be on vacation last week, a quick look at the markets might be surprising. The Treasury curve looks much different this morning than it did on October 3. The 10-year yield has come down from 2.44% and the 2-year yield has dropped from 0.56%. Stocks are now down 5.5% in less than a month and have turned negative for the year (-1.5%). Investor confidence is facing a multi-pronged attack – weak Chinese growth, weak Eurozone growth, possible deflation in the EU, slowing German growth, questions about how effective the ECB can be in stimulating growth, geopolitical unease around the globe, and an Ebola outbreak that no one really knows how to predict. Overnight, the German government cut its growth forecast for 2014 from 1.8% to 1.2% and for 2015 from 2.0% to 1.3%. German investor confidence, as reported by ZEW, fell for a 10th consecutive month in a report released this morning. The index dropped from 6.9 to -3.6, its first negative reading since 2012.
Add to the litany of concerns for investors, the Fed reversed course last week when it took a step in the opposite direction it had been moving. Slowly, but surely, the Fed was laying the foundation for a tightening of monetary policy. Last week’s meeting showed the opposite. With new fears of a stronger Dollar and lower oil prices pushing inflation below the Fed’s stated target, the doves wanted to put the brakes on tightening-talk. Chicago Fed Bank President Evans said yesterday that the biggest risk to the economy now is a premature rate hike. “History has not looked kindly on attempts to prematurely remove monetary accommodation from economies that are in or near a liquidity trap,” said Evans. Meanwhile, the new FOMC Vice-Chairman, Stanley Fischer, said over the weekend that removing accommodation should not prove too deleterious for the world economy. Fischer said, “The normalization of our policy should prove manageable… We have done everything we can, within the limits of forecast uncertainty, to prepare market participants for what lies ahead.” However, he also went on to say, “If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise.”
The October Bloomberg Survey of Economists, released last week, showed little change in economists’ expectations for growth, but a lower outlook for inflation expectations after oil prices have fallen in recent weeks and the Dollar has strengthened. The most notable changes in the Bloomberg consensus view was the interest rate outlook. The combination of a lower inflation outlook and weaker global growth have caused economists to, once again, revise lower their forecast for the 10-year Treasury yield. The 10-year yield is now expect to end 2014 at 2.70%, down from last months’ forecast of 2.75%. Additionally, the improving U.S. economy has led to forecasters raising their Fed Funds target rate forecast in the middle of 2015. The Fed Funds target rate is now expected to end 3Q15 at 0.75%, up from last month’s expectation of 0.50%. The consensus view remains that the Fed will stay on hold until the second half of 2015.
After yesterday’s stock sell-off, bonds are opening this morning with yields sharply lower. The 10-year Treasury yield has dropped from 2.28% Friday to 2.18% this morning while the 2-year yield is now down to 0.36%. If you happened to be on vacation last week, a quick look at the markets might be surprising. The Treasury curve looks much different this morning than it did on October 3. The 10-year yield has come down from 2.44% and the 2-year yield has dropped from 0.56%. Stocks are now down 5.5% in less than a month and have turned negative for the year (-1.5%). Investor confidence is facing a multi-pronged attack – weak Chinese growth, weak Eurozone growth, possible deflation in the EU, slowing German growth, questions about how effective the ECB can be in stimulating growth, geopolitical unease around the globe, and an Ebola outbreak that no one really knows how to predict. Overnight, the German government cut its growth forecast for 2014 from 1.8% to 1.2% and for 2015 from 2.0% to 1.3%. German investor confidence, as reported by ZEW, fell for a 10th consecutive month in a report released this morning. The index dropped from 6.9 to -3.6, its first negative reading since 2012.
Add to the litany of concerns for investors, the Fed reversed course last week when it took a step in the opposite direction it had been moving. Slowly, but surely, the Fed was laying the foundation for a tightening of monetary policy. Last week’s meeting showed the opposite. With new fears of a stronger Dollar and lower oil prices pushing inflation below the Fed’s stated target, the doves wanted to put the brakes on tightening-talk. Chicago Fed Bank President Evans said yesterday that the biggest risk to the economy now is a premature rate hike. “History has not looked kindly on attempts to prematurely remove monetary accommodation from economies that are in or near a liquidity trap,” said Evans. Meanwhile, the new FOMC Vice-Chairman, Stanley Fischer, said over the weekend that removing accommodation should not prove too deleterious for the world economy. Fischer said, “The normalization of our policy should prove manageable… We have done everything we can, within the limits of forecast uncertainty, to prepare market participants for what lies ahead.” However, he also went on to say, “If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise.”
The October Bloomberg Survey of Economists, released last week, showed little change in economists’ expectations for growth, but a lower outlook for inflation expectations after oil prices have fallen in recent weeks and the Dollar has strengthened. The most notable changes in the Bloomberg consensus view was the interest rate outlook. The combination of a lower inflation outlook and weaker global growth have caused economists to, once again, revise lower their forecast for the 10-year Treasury yield. The 10-year yield is now expect to end 2014 at 2.70%, down from last months’ forecast of 2.75%. Additionally, the improving U.S. economy has led to forecasters raising their Fed Funds target rate forecast in the middle of 2015. The Fed Funds target rate is now expected to end 3Q15 at 0.75%, up from last month’s expectation of 0.50%. The consensus view remains that the Fed will stay on hold until the second half of 2015.
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Economic Calendar
Date/Time(Central)
|
Indicator
|
Period
|
Est.
|
Actual
|
Prior
|
Revised
|
10/15/2014 6:00 AM
|
MBA Mortgage Apps.
|
10-Oct
|
--
|
3.8%
| ||
10/15/2014 7:30 AM
|
Empire Manf.
|
OCT
|
20.00
|
27.54
| ||
10/15/2014 7:30 AM
|
Retail Sales
|
SEP
|
-0.1%
|
0.6%
| ||
10/15/2014 7:30 AM
|
Retail Sales Ex-Autos
|
SEP
|
0.2%
|
0.3%
| ||
10/15/2014 7:30 AM
|
PPI Final Demand (MoM)
|
SEP
|
0.1%
|
0.0%
| ||
10/15/2014 7:30 AM
|
PPI (MoM) Ex. Food & Energy
|
SEP
|
0.1%
|
0.1%
| ||
10/15/2014 7:30 AM
|
PPI Final Demand (YoY)
|
SEP
|
1.8%
|
1.8%
| ||
10/15/2014 7:30 AM
|
PPI (YoY) Ex. Food & Energy
|
SEP
|
1.7%
|
1.8%
| ||
10/15/2014 9:00 AM
|
Business Inventories
|
AUG
|
0.3%
|
0.4%
| ||
10/15/2014 1:00 PM
|
Fed's Beige Book Released
| |||||
10/16/2014 7:30 AM
|
Initial Jobless Claims
|
11-Oct
|
285K
|
287K
| ||
10/16/2014 7:30 AM
|
Continuing Jobless Claims
|
4-Oct
|
2380K
|
2381K
| ||
10/16/2014 8:15 AM
|
Industrial Production
|
SEP
|
0.4%
|
-0.1%
| ||
10/16/2014 8:15 AM
|
Capacity Utilization
|
SEP
|
79.0%
|
78.8%
| ||
10/16/2014 9:00 AM
|
Philadelphia Fed Index
|
OCT
|
20.0
|
22.5
| ||
10/17/2014 7:30 AM
|
Housing Starts
|
SEP
|
1002K
|
956K
| ||
10/17/2014 7:30 AM
|
Building Permits
|
SEP
|
1032K
|
998K
|
1003K
| |
10/17/2014 8:55 AM
|
U of Mich. Consumer Confidence
|
OCT P
|
84.0
|
84.6
|
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