Trade Truce Sparks Risk-On Rally. Will it Last?

Dec 03, 2018

G-20 Reaction, Jobs and More Powell

This week will offer a smorgasbord of economic releases and news to keep the market on its toes. First, with the G-20 world leaders jetting back to their respective countries, we are left with what to make of the Trump/Xi meeting. The 90-day delay in new tariffs is providing a strong risk-on tone but we’ll see how long that lasts. Meanwhile. If you enjoyed Fed Chair Jay Powell’s address to the Economic Club of New York last week he’ll be making an encore performance on Capitol Hill before the Joint  Economic Committee on Wednesday. While we don’t expect any new revelations over what we heard last week, if Powell thinks the market interpreted something incorrectly this will be his chance to adjust. Finally, we get November jobs numbers and ISM surveys that all should signal continued strength.


Treasuries

Treasuries

Short-Term Rates

Short-term Rates

Economic Calendar

Economic Calendar

 


Top Events of the Week Top 5 Events for the Week

 

DEC 3 — 7,  2018

1.  G-20 Afterglow — Monday 
2.  November Employment Report — Friday
3.  Fed Chair Powell Testimony — Wednesday
4.  November ISM Manuf. & Non-Manuf. — Mon/Wed
5.  University of Michigan Sentiment — Friday
 

 

1.  G-20/China Trade News Reactions– Monday

After the Fed’s heavy news flow last week this week opens with the news and repercussions from the G-20 meetings held in Buenos Aires over the weekend.  The much-anticipated dinner meeting between President Trump and Chinese President Xi produced the expected positives-spin headlines with a framework announced that will delay any new tariffs for 90 days while meetings are being scheduled to attend to the details.  The market is treating that news with a big risk-on move with stocks higher and bonds trading lower, but nothing outside recent ranges. Color us a little circumspect as we’ve been down this road before with false dawns of promise that a constructive deal can be had only to see the promise crumble as the nitty-gritty details provide a stumbling block. We think that will be the case once again with any back-up in yields stemming from the afterglow of the weekend likely to be short-lived.

 

2.  November Employment Report —Friday

The November jobs release is expected to be another solid report with monthly job growth of 198,000 versus 246,000 in October with the unemployment rate unchanged at 3.7%.  Recall that the October report was especially strong after a somewhat disappointing August release. November’s numbers are expected to revert to the recent trend of near 200,000 monthly job gains and decent wage growth.  The monthly average gain in jobs over the last year has been 210,000 reiterating that the month is expected to be near trend.  Once again, average hourly earnings will be the key metric and it’s expected to increase 0.3% MoM versus 0.2% in October.  Year-over-year average hourly earnings are expected to remain at 3.1%, repeating the October print after it climbed 3/10ths from September’s 2.8%.  The average over the past year has been 2.7%, so a solidly above-average print is expected.

 

3.  Fed Chair Jay Powell Congressional Testimony—Wednesday

After last week’s deluge of Fed information via speeches from Chairman Powell and Vice Chair Clarida and the November FOMC minutes, this week’s Congressional testimony by Powell may seem somewhat anti-climatic.  His appearance before the Joint Economic Committee is not likely to differ markedly from his talk last week but it does provide him a venue to address any misinterpretation he may feel existed after last week’s speech. Thus, we see the appearance as having an asymmetrical risk to the market in that if he felt the market rallied too hard with the “close to neutral” comment he has a chance to walk that back some. On the other hand, we doubt he feels the need at this point to stress further the dovish “close to neutral “reference in his address on Wednesday.

 

4.  November ISM Manufacturing & Non-Manufacturing Survey—Monday/Wednesday

The November ISM Manufacturing Survey is due later this morning with the manufacturing survey expected to print 57.5 versus 57.7 in October.  The average over the past year has been 59.2 so the November result should show a nearly identical sequential print but a decided decrease versus the yearly average. That being said, anything above 50 represents expansion so the survey is likely to show continued strength in the manufacturing sector, albeit with some slight moderation.  The non-manufacturing (services) survey, which encompasses around 90% of the economy, is due Wednesday and the forecast is for it to move slightly lower to 59.1 versus 60.3 in October. The average over the past year has been 58.5 so slight beats against the twelve-month average and well above 50 which indicates the sector continues to exhibit healthy expansion.

 

5.  University of Michigan Consumer Sentiment —Friday

The preliminary read on December consumer sentiment is expected to print at 97.0 compared to November’s 97.5.  The sentiment index has averaged 98.2 over the past year so a below-trend reading is expected which is not unexpected after the recent stock market volatility. The survey also has two inflation measures that are watched by the Fed. Consumers expect inflation over the next year to be 2.8% and the longer-run expectation (5-10 years) moderately lower at 2.6%. The near-term inflation expectation has been edging lower of  late while the longer-term expectation has been steady. In summary, except for the slight downward drift on the one-year, expectations appear fairly well-anchored.

 

 

 


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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