Daily Agenda: APEC Forum Puts Global Growth in the Spotlight

The week kicks off with weak inflation data for China and more bad news for the Russian economy.

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Tomohiro Ohsumi

The financial world is keeping its eyes on economic talks coming out of this week’s 2014 Asia-Pacific Economic Cooperation (APEC) forum, the annual confab of 21 Pacific Rim countries, taking place this year in Beijing. Closer to home, U.S. market sentiment remains strong as earnings season comes into the home stretch. In a report released this morning, Robert Kavcic, senior economist at BMO Capital Markets in Toronto, noted that based on historical patterns, the recent Republican victory in Congress may be a strong bullish catalyst for stocks. According to Kavcic, “Looking ahead to the presidential election, 2015 stands in the sweet spot, as the year before election year is historically the best of the cycle with eye-popping stats—average return of 17 percent, and gains 93 percent of the time.”

Prices slide in China. Inflation data for October released today by the National Bureau of Statistics confirmed the lack of price pressures in the economy. Producer price index levels registered at 2.2 percent compared to the same month in 2013 — the 32 consecutive year-over-year contraction — as fuel prices remain moderate. Consumer prices registered at an increase of 1.6 percent year-over-year, in line with consensus forecasts. As demand remains soft in the nation, the question of whether the People’s Bank of China will increase liquidity measures continues to dominate Chinese market narratives.

Grain prices take the spotlight. With a predicted record harvest in the U.S. this year, today’s Department of Agriculture crop report will be a focus for commodities market watchers with corn, wheat and soybean futures down by double digit percentages versus last year. The USDA’s most recent projections for this harvest were for 3.927 billion bushels of soybeans and 14.475 billion bushels of corn. Globally agricultural surpluses are outpacing analyst forecasts as well, with world grain supplies on track to hit a 15-year high.

Russian economy continues to falter. The Bank of Russia, the country’s central bank, today published a revised monetary policy plan that projected a GDP level of zero percent for 2015 and extended its projected 4 percent inflation target to 2016. The bank has raised benchmark rates four times year-to-date as inflationary pressure driven by Western sanctions and a tumbling ruble has exacerbated the nation’s economic problems, already beleaguered by low oil prices. Separately, Russia and China announced a second major natural gas contract with President Vladimir Putin signing a preliminary agreement in Beijing over the weekend in advance of the APEC summit.

Informal referendum shows Catalonia favors independence. More than 2 million Catalans headed to the polls yesterday, with a vote of more than 80 percent for independence, according to early reporting. Despite the fact that the vote was not recognized by the central government in Madrid, European Union senior officials observed the process. In a report published this morning, Société Générale analyst Yvan Mamalet noted that early elections in Catalonia are now likely to be called in the next few days, ultimately leading to more autonomy for the region.

Portfolio Perspective: U.K. Rates Strategy: Delay and DecideMoyeen Islam, Barclays

The decision by the Bank of England’s Monetary Policy Committee (MPC) to maintain its current policy stance was widely expected. October’s purchasing managers’ index (PMI) surveys, while still at healthy levels, are consistent with a slowing down of growth from the quarter-over-quarter 0.9 percent seen in the second quarter of 2014. The monthly survey numbers have now fallen below their 12-month moving averages, thus are indicative of a deceleration of headline growth. Note, however, that the PMIs remain consistent with growth at around 0.6 to 0.7 percent quarter-over-quarter, continuing expansion that began in the latter half of 2012. Consensus Economics has GDP forecasts for 2015 at 2.6 percent, compared to our projection of 2.7 percent and the Bank of England’s forecast of 2.9 percent. While growth expectations still remain solid, it has been noticeable that inflation expectations have been falling in the second half of the year. Cumulatively, the survey-based measure has fallen by 0.4 percent over the year, a move consistent in magnitude with the fall in short-term market expectations for realized inflation in 2015.

The November Inflation Report press conference November 12 is likely to see Bank of England governor Mark Carney endorse MPC insiders’ current view that rate tightening can be delayed, as domestic inflationary pressures and wage pressures remain muted. MPC speakers have been non-committal on the timing of the first hike, more insistent that the initial ceiling of rates is lower than in previous cycles. Over the summer, however, the MPC said it was surprised at how little was priced into the first year of the curve, a time when data were not materially stronger, unemployment was higher and inflation was stable. Carney may thus allude to the need for more risk to be priced into the first year of the curve. Here, his reasoning may be that he does not wish to see the market close off the option of an earlier rate move from the MPC since there are already two members voting for tightening policy, who seem unlikely to roll back their votes in the near term.

Moyeen Islam is a director and fixed-income strategist for Barclays in London.

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