Geopolitical Tensions Greet New Year

Jan 06, 2020
Protests in Iran

Geopolitical Tensions Greet New Year

The U.S. killing of a top Iranian general in Baghdad last Friday and the threat of Iranian retaliation is likely to overhang the market this week. There are dozens of U.S. military installations and other assets in Iraq and surrounding areas that could be at risk of reprisal. If that happens expect a U.S. response and further escalation of hostilities. This potential will keep a bid in all manner of risk-averse assets like gold,  oil and, of course, Treasuries. With geopolitical tensions the primary yield driver this week, the December jobs report on Friday may also aid a bid in Treasuries.  Forecasts are calling for 160k job gains versus 266k in November. With the previously striking GM workers no longer skewing numbers, the December report should give us a clean look at job growth as we head into 2020. The ISM Non-Manufacturing Index will give us another tell on December. The manufacturing sector reported last Friday in disappointing fashion with the lowest ISM print since June 2009.  The services sector, however, constitutes nearly 90% of the economy and has outperformed the manufacturing sector. The index is expected to be 54.5 versus 53.9 in November.


Treasuries
Treasury Curve Today Week Change
3 Month 1.51% -0.04%
6 Month 1.54% -0.05%
1 Year 1.52% -0.06%
2 Year 1.54% -0.03%
3 Year 1.54% -0.05%
5 Year 1.59% -0.08%
10 Year 1.78% -0.10%
30 Year 2.24% -0.09%
Short-Term Rates
Fed Funds 1.75%
Prime Rate 4.75%
3 Mo LIBOR 1.87%
6 Mo LIBOR 1.89%
12 Mo LIBOR 1.96%
Swap Rates
3 Year 1.572%
5 Year 1.590%
10 Year 1.728%
Economic Calendar
Date Statistic For Briefing Forecast Market Expects Prior
Jan 6 Markit US Composite Dec F 52.2 52.2 52.2
Jan 7 ISM Non-Manufacturing Dec 54.5 54.5 53.9
Jan 7 Factory Orders Nov -0.6% -0.7% 0.3%
Jan 8 ADP Employment Change Dec 165k 160k 67k
Jan 10 Change in Nonfarm Payrolls Dec 163k 160k 266k
Jan 10 Change in Private Payrolls Dec 155k 154k 254k
Jan 10 Unemployment Rate Dec

3.5%

3.5% 3.5%
Jan 10 Avg. Hourly Earnings (MoM) Dec 0.3% 0.3% 0.2%
Jan 10 Avg. Hourly Earnings (YoY) Dec 3.1% 3.1% 3.1%

calendar icon Top 5 Events for the Week

January 6-10, 2020

1. Fallout From Geopolitical Tensions – All Week
2. December Employment Report – Friday
3. December  ISM Non-Manufacturing Index – Tuesday
4. Fed Officials Speaking – Wed./Thurs.
5. November Factory Orders – Tuesday

 

1.  Fallout From Geopolitical Tensions – All Week

The U.S. killing of a top Iranian general in Baghdad last Friday and the threat of retaliation from the Iranian government is likely to overhang the market during the week. Iran’s supreme leader, Ayatollah Ali Khamenei, called for three days of public mourning, which ends today, followed by retaliation. There are dozens of U.S. military installations and other assets in Iraq and surrounding areas that could be at risk of reprisal. If that happens expect a U.S. response and further escalation of hostilities. This is likely to keep a bid in all manner of risk-averse assets like gold, the dollar and, of course, Treasuries.  Investors waiting for the 10-year yield to push above 2.00% will likely be frustrated as the flight-to-safety trade keeps yields just under the 1.80% level, the lowest in nearly a month.

 

2.  December Employment Report – Friday

With geopolitical tensions the primary driver of yields this week, the December jobs report on Friday could also aid a bid in Treasuries.  For December, forecasts are calling for 160k job gains versus 266k in November. With the previously striking GM workers no longer skewing numbers, the December report should provide a cleaner pace of job growth as we head into 2020. Private sector jobs are expected to increase 154k versus 254k in November.  The unemployment rate is expected to remain at 3.5% for a second straight month, which remains the cycle low. Meanwhile, wage gains are expected to improve to 0.3% from November’s 0.2%. YoY wage gains are expected to also remain unchanged from November at 3.1%.  In summary, if the report comes as expected it will reflect a labor market that continues to demonstrate solid, if less spectacular, gains and that will keep the Fed on the sidelines as we move through the first half of 2020.

 

3.  ISM Non-Manufacturing Index – Tuesday

Along with this week’s jobs report the ISM Non-Manufacturing Report will give us another early tell on December activity with the manufacturing sector reporting last Friday in disappointing fashion.  That report printed a 47.2 versus an expected 49.0 and 48.1 in November. The December print was the lowest since June 2009. The 50-level is the dividing line between an expanding and contracting sector so the December result represents a manufacturing sector in deepening contraction. The ISM Non-Manufacturing Index follows tomorrow.  The services sector constitutes nearly 90% of the economy and it’s been stronger than the manufacturing side, albeit softening some in recent months.  That being said, the services index is expected to be nearly unchanged at 54.5 versus 53.9 in November. The index has averaged 55.8 over the past year so a modest decrease is expected from the yearly average but still above 50 indicating more health in the services sector compared to the weaker manufacturing sector.

 

ISM Manufacturing and Non-Manufacturing

 

4.  Fed Officials Speaking – Thursday

The holiday break followed the FOMC meeting on December 11 so this week is the first real chance to get any new economic outlook from Fed officials. The first to speak on the economy will be Vice Chair Clarida on Thursday morning in New York and John Williams at the Bank of England a little bit later. Clarida is a tad dovish while Williams a bit more hawkish but both could also correctly be labeled as moderates so we’re not expecting anything earthshattering, but any comments regarding policy given the latest increase in geopolitical  tensions will be a highlight.

 

5.  November Factory Orders – Tuesday

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 Factory Orders Report due tomorrow will be another look at the sector. While the November numbers are prior to the recently announced Phase 1 trade deal, expectations are for a slight decrease of -0.7% MoM versus a 0.3% increase in October. Thus, while the Phase 1 trade deal awaits signing, the November Factory Orders, and the aforementioned ISM Manufacturing disappointment, point to a manufacturing sector that could dearly use a lift from the trade deal.

 


bar graph icon  Yield/Duration Matrix

 Yield/Duration Relationship 

CenterState Disclosure

 


 

Tom Fitzgerald Signature 

Thomas R. Fitzgerald

Director, Strategy & Research

Tfitzgerald@centerstatebank.com

 

Download / Print as a PDF