January 19, 2016
Prior Week Summary
The rout in commodities and global equities continued in earnest last week as concern grows among market participants that the deceleration of growth in China will have ripple effects through all financial assets. Sentiment in markets has become incredibly negative, with some going so far as to analogize the current market, and its outlook, to the credit crisis of 2008. A prominent equity market participant, and CEO of one of the world’s largest asset management firms, went so far as to say that stocks could fall another 10% and oil another 20% before finding solid ground.
China reported a major deceleration in its rate of growth last year, which has compounded concerns over a global slowdown. The growth rate slowed to 6.9% for 2015, which was the lowest level on that metric since 1990. At the same time, industrial production has fallen to its lowest levels in decades.Not surprisingly, in its annual outlook that was released early last week, the IMF lowered its forecast for global growth to 3.4% citing meaningful downside risks.
On the commodities front, the price of oil took center stage last week as WTI and Brent Crude fell meaningfully below $30 a barrel. The International Energy Agency, in its first monthly report of the year said that 2016 supply is forecasted to exceed demand by over 1 million barrels a day as Iran could bring an incremental 300,000 barrels a day online by the end of the first quarter of this year.
Not surprisingly given this difficult backdrop, Treasury yields traded sharply lower last week, led by losses in the belly of the curve. Indeed, the 5 and 7-year notes fell in yield by approximately 11 basis points, while the 2-year dropped 8 basis points in “risk-off” trading. Accordingly, the markets have effectively “erased” one of the projected rate hikes that had previously priced in as recently as last week. Only time will tell if the Fed will continue lowering its forward projections to catch up with the market.
The Look Forward
Relatively active data calendar on schedule for this week with updated information expected on Housing Starts, Building Permits, CPI, Philly Fed, Initial Jobless Claims, and the Richmond Fed Manufacturing Index. The government is scheduled to auction $15b in TIPS on Thursday.