The end of Fed’s zero-interest-rate policy moves into 2016

Julius Baer - Jueves, 16 de Octubre

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Yesterday’s string of disappointing economic data out of the US is seriously challenging our expectations that the US Federal Reserve (Fed) will start normalising interest rates in mid-2015. We shift the expected lift-off date into late 2015 and consider even an end of zero-interest-rate policy only in 2016 a likely scenario. The Fed’s Beige Book report did not signal that much of a deterioration of business conditions, reporting “modest to moderate” growth in the US economy. But disappointing September retail sales, weaker small business opti-mism and a fall in the Empire State Manufacturing Indicator are warning signs that the US economy is not immune against a stronger currency and a deteriorating growth outlook for the rest of the world. In addition, inflation pressure is easing with producer prices declining on a monthly basis and the annual rate rolling over. We expect consumer price inflation to display the same pattern when reported next week. This gives the Fed more time to wait before start hiking rates and stick to its “considerable time” rhetoric also at its next meeting. The Fed’s late take-off date makes us more confident in our three-month EUR/USD forecast of 1.30.

 

Disappointing US data sends a clear signal that the US is not immune against a stronger US dollar and weaker growth in the rest of the world. The Fed’s zero-interest-rate policy will be maintained for longer.

COMMODITIES

 

‘Risk off’ rout hits cyclical metals

 Carsten Menke, Commodity Research, Bank Julius Baer

Amid mounting global growth worries, financial markets switched into ‘risk off’ mode yes-terday, hitting cyclical metals and supporting gold. Within the cyclical metals, palladium suffered the most as prices fell almost 3.3% to USD 760 per ounce. While investors sold metal out of physically backed products, total holdings remain close to the record levels set in summer. At the current point in time, we believe further investor selling poses the biggest short-term risk to palladium prices while uncertainties over the medium to longer-term outlook have risen. However, it is too early to call for a major slowdown in Chinese or US car sales which would weigh heavily on demand from automotive catalysts. Hence, we maintain a longer-term positive view on palladium but refrain from entering the market in the current shaky environment. Meanwhile, gold reclaimed the level of USD 1,240 per ounce, benefitting from short-covering in the futures market and US dollar weakness but failing to show signs of returning investment demand. While growth worries may keep prices supported in the short-term we do not expect them to reverse gold’s longer-term downtrend.

 

Although longer-term fundamentals remain positive, we refrain from entering the palladium market at the current point in time. Investor selling poses the biggest short-term risk to prices.

 

 

FIXED INCOME

 Emiliano Surballe, Research, Bank Julius Bär

 

Lower global growth expectations triggered a large risk-off driven sell-off yesterday

Yesterday was a very unusual day for bond markets. After months of discussing higher rates and somewhat lack of directional view, the market sold off strongly on the back of concerns of lower growth. Ten-year Treasuries went below 2% from 2.23%, to then close the day at 2.13%.The negative revision of growth by the International Monetary Fund (IMF) was one of the key events that exacerbated these concerns. On top of these, uncertainty over the out-come of the asset quality review of European banks and the possibility of a highly negative outcome in Brazilian elections, plus parliamentary elections in Ukraine, will most likely keep investors nervous for the rest of the month.

 

We expect the risk-off sentiment to prevail over the coming weeks, thus we continue to suggest staying out of high-yield bond segments and stick to more liquid seg-ments of the bond market such as US high-grade bonds.

 

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