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November 13, 2015

Global Growth Concerns Weigh on Risk Assets

Stocks declined while Treasuries and swaps rallied off the back of renewed global growth concerns.  Eurozone GDP unexpectedly slowed to 0.3% in the third quarter, down from 0.4% in Q2.  Analysts were expecting a 0.4% rise, but the headline number was dragged down by weakness in Italy and Germany.  While the Eurozone has been out of recession for a while now, it's troubling that growth remains below expectations given how loose monetary policy has been in the region for years.  Money markets in Europeare essentially already pricing in additional easing from the ECB when it meets in December.  The Chinese growth outlook also further deteriorated as Chinese stocks fell to a five-week low off the back of slumping credit growth.

The growth outlook for the US is brighter than in Europe and China, but today’s data was mediocre.  October retail sales came in weaker than expected (0.1% actual vs. 0.3% consensus) due to a 0.5% drop in vehicle sales.  Consumer retail stocks took a beating as a result, dragged down by lower full-year forecasts from Macy’s and Nordstrom.  It’s worth noting that the retail sales report doesn’t include consumer spending on services, which makes up about 67% of the total.  Strong service spending is likely to buoy GDP headed into year-end.  A separate report showed disappointing producer prices contracted 0.4% in October, far below market expectations for a 0.2% rise.

Aside from the data, the market digested hawkish comments from Cleveland Fed President Mester.  Mester said the time to hike rates is “quickly approaching”, reiterating her stance that the economy can handle the repercussions.  She makes the case that an initial hike isn’t indicative of tight financial conditions since rates would remain at extraordinarily low levels.

 

 

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