After the Trade Deal Now What?
This week is likely to see reverberations and perhaps a fuller understanding of the implications from the US/China trade deal because the Friday headlines left traders looking for more. The attention, however, will quickly turn to the implications of a phase 2 deal. President Trump said those talks will likely extend beyond next year’s election and that probably boosted Friday’s Treasury rally: more trade-related uncertainty for next year despite a holiday-inspired détente in current hostilities. The fact that two big geo-political overhangs (the other being the UK election) were somewhat resolved with little yield damage has us asking what is there left that could push 10-year yields over 2%? With expectations of easing GDP growth and inflation we struggle to find an easy answer to that. Meantime, November personal income and spending are due Friday with a bounce in both expected. Perhaps more importantly for the Fed, core PCE is expected to trend lower from 1.6% to 1.5%. That trend, along with the expected slowing in GDP are some of the reasons we think the next Fed move will be a cut at some point in 2020, despite what the latest dot plots say.
|Treasury Curve||Today||Week Change|
|3 Mo LIBOR||1.90%|
|6 Mo LIBOR||1.90%|
|12 Mo LIBOR||1.96%|
|Date||Statistic||For||Briefing Forecast||Market Expects||Prior|
|Dec 16||Empire Manufacturing||Dec||4.0||3.5 actual||2.9|
|Dec 17||Housing Starts (MoM)||Nov||2.0%||2.3%||3.8%|
|Dec 17||Building Permits (MoM)||Nov||-3.8%||-2.9%||5.0%|
|Dec 17||Industrial Production (MoM)||Nov||0.8%||0.8%||-0.8%|
|Dec 19||Philly Fed Biz Optimism||Dec||8.0%||8.0%||10.4%|
|Dec 19||Leading Index||Nov||0.1%||0.1%||-0.1%|
|Dec 19||Existing Home Sales (MoM)||Nov||
|Dec 20||Personal Income||Nov||0.3%||0.3%||0.0%|
|Dec 20||Personal Spending||Nov||0.4%||0.4%||0.3%|
Top 5 Events for the Week
December 16-20, 2019
1. Continuing Fallout From Trade Deal –All Week
2. November Personal Income & Spending–Friday
3. November Leading Index –Thursday
4. November Housing Activity –Tues./Thurs.
5. November Industrial Production –Tuesday
1. Continuing Fallout from Trade Deal—All Week
The confirmation Friday that we have a trade deal was a case of sell the rumor buy the news. Treasuries sold off hard on Thursday as bits and pieces of news leaked out about a deal, but when more details emerged on Friday Treasuries rallied after said details were more pedestrian and not indicative of a larger, more substantive deal. That Treasuries rallied on Friday indicates uncertainties remain. To wit, President Trump commented on Friday that a phase 2 trade deal may wait until after the November election indicating trade uncertainties are likely to remain front and center in 2020. We stand to glean more this week as the reverberations continue but we view any yield back-ups that develop as being more a buying opportunity than reflective of a longer-lasting turn higher.
2. November Personal Income & Spending –Friday
Given GDP’s recent reliance on consumer consumption the November income and spending numbers will be viewed closely for continued strength. For the month, income is expected to have increased 0.3% versus a flat October. Spending is expected to have increased 0.4% versus 0.3% in October. The Fed’s preferred inflation measure, core PCE, is expected to increase 0.1% matching the October increase, while year-over-year it’s expected to tick lower from 1.6% to 1.5%. That trend in core PCE is another reason we believe the Fed is either on hold for a lengthy time and/or the next move is a rate cut, not a hike as projected in the dot plots. In any event, the Bloomberg consensus estimate of fourth quarter GDP is 1.6%, down from 2.1% in the third quarter. That’s another reason we see the next move as a cut.
3. November Leading Index —Thursday
The Conference Board’s Leading Indicators Index is a compilation of metrics that tend to foretell economic direction, and it is particularly useful as a predictor of recessions. The index always falls well below zero prior to a recession and earlier in the year the index was flirting with the zero-level and printed a –0.3 in June. The index, however, rebounded later in the summer and would need to move below -1.0 to provide a reliable recession signal. That being said, the November number is expected to rebound to 0.1 versus October’s -0.1. If the index matches expectations it will be a signal that the economy has slowed but continues to avoid flirting with early-stage recession signals.
4. November Housing Starts, Permits & Existing Sales—Tuesday/Thursday
November housing starts are expected to increase 2.3% (1.34 million annualized) versus a 3.8% gain in October. Building permits are expected to decrease –2.9% (1.418 million annualized) versus a 5.0% pop in October. The average in starts over the past year has been 1.24 million and permits 1.33 million. Thus, both November readings are expected to exceed annual averages indicating continued momentum in the sector. Meanwhile, Thursday’s existing home sales are expected to decrease –0.4% to 5.44 million units annualized. The average over the past year has been 5.29 million so a decent gain over the yearly average is expected despite the small expected sequential decrease.
The manufacturing sector has been mired in a slump for nearly a year as the uncertainties over the trade dispute with China weighed heavily on the sector. The November Industrial Production Report due tomorrow will be another look at the sector. While the November numbers are prior to the just announced phase 1 trade deal, expectations are for a slight rebound of 0.8% MoM versus a –0.8% decline in October. Backing out the somewhat volatile utility sector, manufacturing is also expected to increase 0.9% compared to a decline of –0.6% the prior month. Thus, expectations are for a tentative bounce in the industrial/manufacturing sector.
Thomas R. Fitzgerald
Director, Strategy & Research