Gathering Geo-Political Clouds Obscure Economic Numbers

Dec 10, 2018
Palace of Westminster, London

Geo-Political Clouds, CPI and Retail Sales

This week provides a solid slate of first-tier data releases from November inflation readings to retail sales  but the headlines are likely to be dominated by geo-political issues. First, the arrest in Canada of the China-based Huawei CFO for violations of Iranian sanctions effectively announces a raising of the stakes by the U.S. regarding China trade, and particularly intellectual property theft. How the Chinese respond and the subsequent U.S. response will have investors on edge. Meanwhile, tomorrow’s planned parliamentary vote on Theresa May’s negotiated Brexit plan has been cancelled due to a lack of votes and that throws the whole Brexit process into uncertainty and confusion, not to mention possibly threatening May’s government itself.  Finally, CPI and Retail Sales will give us additional information about November following the jobs report on Friday, but the uncertainty surrounding the geo-political angle is likely to keep a bid in Treasuries despite what the economic reports may reveal.  


Treasuries

Treasuries

Short-Term Rates

Short-term Rates

Economic Calendar

Economic Calendar

 


Top Events of the Week Top 5 Events for the Week

DEC 10 — 14,  2018

1.  China Trade War Developments — All Week 
2.  U.K. Brexit Vote Delayed — Tuesday
3.  November Inflation Readings — Tuesday/Wednesday
4.  November Retail Sales — Friday
5.  November Industrial Production — Friday
 

 

1.  China Trade War Developments– All Week 

The arrest in Canada, at the request of the U.S., of the China-based Huawei CFO last week for violations of Iranian sanctions effectively announces the stakes are being raised by the U.S. on the issue of China trade and intellectual property theft.  Perhaps unknown to many Americans Huawei is a huge, and vitally important tele-communications firm in China but one that has a long history with IP theft, corporate espionage and other practices that strike at the heart of the China/U.S. trading dispute. While the trade deficit is one issue that has spawned the use of tariffs, the more critical issue is intellectual property theft. Huawei is attempting to make a strong play in the emerging 5G technology field  and has been accused of illegally acquiring technology that reduces the edge that American companies enjoy  in this emerging field. How China responds to this stake-raising  has the potential to send a negative jolt through the global trade story with safe-haven buying in Treasuries the obvious play. So far, Chinese officials have made critical remarks regarding the arrest but they appear to want to keep the issue separate from the other trade issues but this, as they say, is a developing story.

 

2.  May Cancels U.K. Parliament Vote on Brexit Plan —Tuesday

The scheduled parliamentary vote tomorrow on Prime Minister Theresa May’s Brexit Plan has been cancelled as the plan looked certain to be voted down. The sticking point has been the so-called Irish Backstop in the plan that says that in order to keep an open border between the Republic of Ireland (EU member) and Northern Ireland (UK member) will have to continue to adhere to EU customs rules and regulations. Northern Ireland politicians (and citizens) aren’t happy with this contrivance and other parts of the U.K. aren’t happy with it either as the whole reason for Brexit was to divorce from EU rules and regulations.  What happens at this point is anyone’s guess. May is expected in Brussels on Thursday and may ask for some positioning room on the backstop question that could allow a successful vote, but the EU seems unlikely to reopen a plan they have already approved. The uncertainty is weakening the British pound and that uncertainty also provides another safe haven bid in Treasuries.

 

3.  November Inflation Readings—Tuesday/Wednesday

After the geo-political concerns this is the week of inflation discovery. In addition to the PPI and CPI releases we also get import price changes and the Real Average Hourly Wage series which will provide a look at the earnings power of the consumer after inflation. The most important release, however, will be the November CPI release on Wednesday. Expectations are for November to be flat after a 0.3% gain in October.  The core rate (ex-food and energy) is expected to increase 0.2% matching the gain in October.  On a year-over-year basis, CPI is forecast to drop 3/10ths to 2.2% from October’s 2.5% while core CPI YoY is expected to increase 1/10th to 2.2% versus 2.1% the prior month. While the YoY measures are above the Fed’s stated 2% benchmark the Fed’s preferred inflation measure, core PCE, remains slightly under 2% at 1.8%. The trend for PCE is to run 30bps below  CPI so if core CPI hits expectations at 2.1% that implies core PCE will remain near 1.8%. That will have the trend in core CPI and PCE either static or decreasing over the past several months and would allow the Fed to relent on rate hikes if economic numbers start to show moderation between now and the March FOMC meeting.

 

CPI year over year

 

4.  November Advance Retail Sales—Friday

The November Retail Sales Report is due Friday and expectations are for most key metrics to be solid but off the strong October readings while the all-important Control Group reading (which is a direct GDP input) is expected to post a solid 0.5% gain versus 0.3% in October. Overall sales are expected up 0.1% versus 0.8% in October while sales ex-autos & gas are expected up 0.4% versus 0.3% in October. The expected strong back-to-back reading in the control group should keep fourth quarter GDP estimates in line or higher. The Bloomberg consensus estimate is for GDP to increase 2.6% as consumer consumption eases off the 3.6% third quarter splurge to a moderate 2.8%.

 

5.  November Industrial Production —Friday

Expectations are for October industrial production to increase 0.3% month-over-month versus 0.1% the prior month.   The average over the past year has been 0.34% so a near on-trend print is expected. Stripping out the volatile utility component manufacturing is expected to be up 0.3% matching the prior month.  The average over the past year has been 0.2% so an above-average print is expected. Finally, capacity utilization is expected to be 78.6% versus 78.4% the prior month indicating excess capacity is slowly being taken up. In total, a solid read from the manufacturing/industrial sector is expected and may provide another data point that says the goods-producing economy continues to motor along despite tariff wars and other off-shore weakness/concerns.

 

 

 


Technicals Investment Yield Ranges Over Last Year

 

US Treasuries

FHLB Agency Bullets

Mortgage Backed SecuritiesMunicipals

US Corporate - Financials

US Agency Swap Rates

 Source: Bloomberg

 

 

 


 

Tom Fitzgerald Signature

Thomas R. Fitzgerald

Director, Strategy & Research

Tfitzgerald@centerstatebank.com

 

 

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