By Min Zeng, Corrie Driebusch and Mike Cherney
Traders are bracing for another hectic week, fueled by an
increasingly fractious debate over whether it is the global economy
or just financial markets that are showing signs of ill health.
Stocks have swooned in 2016, led by economically sensitive
sectors such as banks, car companies and consumer shares.
Meanwhile, the prices of safe government bonds have surged, sending
the yield on the 10-year U.S. Treasury note down more than half of
a percentage point this year.
Those trends, along with a rise in so-called credit spreads--or
the yield premium that investors demand for buying bonds riskier
than Treasurys--are widely taken as possibly signaling
recession.
Yet many investors say they detect no sign that the U.S. economy
is in danger of falling into a recession, defined as two quarters
of contracting output. Instead, they see an economy continuing to
expand, if at an uneven pace, borne out in many months of solid
employment gains and, most recently, Friday's
stronger-than-expected retail-sales data. Some say those relying on
market signals of recession risk watching a broken gauge that no
longer reflects the internal health of the economy as it did before
the age of expansive central-bank policy.
Analysts and portfolio managers say they expect volatility to
continue to rise while the debate plays out, a recipe for further
large moves in stocks, bonds and currencies.
"We are at a point of instability in markets," said Jason Evans,
co-founder of hedge fund NineAlpha Capital LP in New York, who is
former head of U.S. government-bond trading at Deutsche Bank AG and
Goldman Sachs Group Inc. "People just don't know what is going
on."
A widely followed gauge of volatility in the $13 trillion U.S.
government-bond market reached a one-year high last week.
Volatility in currency markets is at its highest level since late
2011, according to the JP Morgan Global FX Volatility Index.
Wall Street's fear gauge for stocks, the CBOE Volatility Index
of options-based price-swing expectations, rose last week though it
remains well below its recent high last August.
The moves capture the rising anxiety among money managers over
how to allocate assets amid uncertainty over economic growth and
the impact of exotic monetary-policy tools on the global financial
system.
Some fear that Friday's U.S. market rally will be short lived,
as traders in China on Monday get a chance to catch up with recent
developments. U.S. stock and bond markets are closed for the
Presidents Day holiday Monday, which is when Chinese markets will
open for the first time since the weeklong the Lunar New Year
holiday closure.
"The feeling is that we could see something out of China" and
not be able to react in U.S. markets until Tuesday, said Jim Ryan,
senior vice president at WallachBeth Capital.
Also Monday, European Central Bank President Mario Draghi is
scheduled to address a European Parliament committee in Brussels.
Mr. Draghi in January hinted that the central bank could deliver
more stimulus at its March meeting.
On Wednesday, the Federal Reserve is scheduled to release the
minutes of its last policy meeting, which traders will scour for
clues about officials' desire to further raise interest rates
following December's first increase in nine years.
And on Friday the U.S. government will release the
consumer-price index for January, giving analysts a fresh chance to
see if inflation, below the Fed's 2% target for 44 straight months,
is ticking up.
Interest-rate futures that Wall Street uses to bet on the Fed's
rate policy are forecasting no rate increases by the Fed this
year.
The market turmoil has Fed officials reassessing whether their
projections for steady growth and job gains and gradually rising
inflation will hold up in coming months. For now, officials are
sticking to their view that the expansion will continue and
interest rates will rise, though Fed Chairwoman Janet Yellen, in
congressional testimony last week, emphasized that she wants to
keep her options open.
"We are quickly approaching a showdown between what the market
believes and what the Fed believes," said Kevin Giddis, head of
fixed-income capital markets at Raymond James. "This obvious
disconnect between the two is causing much of the recent
volatility. That will likely continue until the data proves one
right and the other wrong."
Few believe that process will be either quick or painless,
reflecting in part the paucity of clear economic signals at a time
when the U.S. remains by some measures the healthiest large economy
even with headline growth figures far below pre-crisis norms.
"We will look back at some point and say this is a blip, but I
think it's going to be longer than six months," said Jim Sarni,
managing principal at Payden & Rygel, who said markets could be
volatile until the U.S. presidential election in November.
Of the economy, he said, "It's not hunky dory, but I think
things are on a solid footing."
Saumya Vaishampayan contributed to this article.
(END) Dow Jones Newswires
February 14, 2016 14:43 ET (19:43 GMT)
Copyright (c) 2016 Dow Jones & Company, Inc.