- Weaker than expected, but rather innocuous, US data fuel further deterioration in risk appetite
- Market hysteria evident in rapid collapse in Treasury yields, but pessimism is overdone
- Macro drivers still consistent with global economic recovery, with fall in oil adding to positives
A rather innocuous dip in US retail sales…
Weaker than expected US economic data gave investors a fresh reason to take flight and seek safe havens. Though a sober look at the data makes it difficult to understand the hysteria. Retail sales declined by 0.3% mom in September, but that followed a gain of 0.6% mom the previous month. The outcome was lower than consensus forecast of -0.1% mom. The weak report partly reflects the softer gasoline sales, simply on account of lower gasoline prices, while volatile auto sales also declined. Core sales which are used by the Commerce Department to estimate consumer spending in the GDP declined by 0.2% following a 0.4% the previous month. Retail sales data can be volatile but the underlying trend still looks solid. In addition, consumer fundamentals are healthy. In particular, we think that the strong labour market, which has added more than 244K jobs per month on average this year will support consumption going forward. On top of this, lower gasoline prices will boost households’ real disposable income.
…and a regional manufacturing survey…
The New York Fed’s Empire State manufacturing survey indicated that business conditions for New York manufacturers fell back to 6.17 in October after it rebounded in September to 27.54, which was the highest reading since October 2009. The details of the report showed that while the new orders dropped 19 points to -1.7, the employment index rose 7 points to 10.2. Indexes for the six month outlook were a bit lower than last month, but continue to convey a degree of optimism regarding future business conditions. This survey has been a bit more downcast compared to the more reliable ISM manufacturing survey, which has been at elevated levels. In addition, regional manufacturing surveys tend to be volatile.
…the latest reasons for deterioration in risk appetite…
The data further hurt investor sentiment. This is a trend that started at the beginning on the month, ostensibly driven by concerns about global economic growth and fears that compression in risk premia had gone too far. Yesterday’s weaker than expected US economic data releases appear to have added to these concerns. The US economy has been seen as one of the few bright spots. But dovish comments from some Fed speakers, suggesting that the US economy would be undermined by weak foreign demand rather than vice versa, have led investors to question the strength of the US economy. Risky assets sold off further, with US and European equities seeing sharp falls, while the US dollar fell across the board. What is more, growth sensitive commodity prices came further under pressure, while safe havens gained. Indeed, government bonds rallied strongly. Investors also sharply adjusted downwards their view on Fed rate hikes for 2015. Remarkably US 10-year Treasury yields rapidly collapsed to a quoted low of 1.86% (from 2.16%) before edging higher again.
…but pessimism is overdone
As we have noted a number of times now over the last few days, a look beneath the surface suggests that the pessimism is overdone. We still think that macro drivers are consistent with stronger global growth. This should be driven by robust growth in the US lifting other countries around the world. In addition, policymakers in weaker economies such as the eurozone and Japan are continuing to add monetary stimulus and could well step up their efforts going forward. The Chinese authorities are providing targeted support to meet their lower – but still high – growth targets. Last but not least, the sharp fall in oil prices will provide considerable support to global demand. Every USD 10 fall in oil prices increases global GDP by 0.3 percentage points according to our estimates. There is a risk that the pessimism on markets becomes self-fulfilling as financial conditions tighten and confidence in the real economy deteriorates. Though we think it is more likely that stronger economic data will instead lift the gloom and support an improvement in investor risk appetite going forward.