Geopolitical Tensions Ebb

Jan 13, 2020
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Geopolitical Tensions Ebb But Remain a Factor

While the extreme tensions following the U.S. killing of a key Iranian general have subsided, tensions still remain.  While official Iranian military actions may be sidelined for now, they have a roster full of proxy militias no doubt willing and able to conduct smaller-scale havoc. This fact is likely to keep a bid in Treasuries, especially as the December jobs report wasn’t as strong as expected. Away from the geopolitical angle, we do get a handful of first-tier economic reports to check the pulse of the economy. In that regard, the consumer has mostly stood fast against all the trade and geopolitical headlines of the past several months and with the crucial holiday-selling season hanging in the balance, December retail sales are expected to show a nice uptick over what were modestly disappointing figures in November. That report is due Thursday.  Tomorrow, December CPI is expected to provide another modest inflation read, allowing the Fed to stay in pause mode well into 2020.The latest read on consumer sentiment is due Friday.


Treasuries
Treasury Curve Today Week Change
3 Month 1.53% +0.02%
6 Month 1.54% UNCH
1 Year 1.52% UNCH
2 Year 1.58% +0.04%
3 Year 1.59% +0.05%
5 Year 1.65% +0.06%
10 Year 1.84% +0.06%
30 Year 2.31% +0.07%
Short-Term Rates
Fed Funds 1.75%
Prime Rate 4.75%
3 Mo LIBOR 1.84%
6 Mo LIBOR 1.87%
12 Mo LIBOR 1.97%
Swap Rates
3 Year 1.620%
5 Year 1.644%
10 Year 1.791%
Economic Calendar
Date Statistic For Briefing Forecast Market Expects Prior
Jan 14 CPI YoY Dec F 2.4% 2.4% 2.1%
Jan 14 Core CPI YoY Dec 2.3% 2.3% 2.3%
Jan 15 Empire Manufacturing Jan 4.0 3.5 3.5
Jan 16 Advance Retail Sales MoM Dec 0.3% 0.3% 0.2%
Jan 16 Retail Sales Ex Auto & Gas Dec 0.4% 0.4% 0.0%
Jan 16 Retail Sales Control Group Dec 0.3% 0.4% 0.1%
Jan 17 Housing Starts MoM Dec

1.1%

1.1% 3.2%
Jan 17 Industrial Production MoM Dec 0.0% -0.1% 1.1%
Jan 17 U. of Mich. Sentiment Jan P 99.2 99.3 99.3

calendar icon Top 5 Events for the Week

January 13-17, 2020

1. Fallout From Geopolitical Tensions – All Week
2. December Retail Sales – Thursday
3. December  Inflation Readings – Tuesday
4. January Univ. of Michigan Sentiment Survey – Friday
5. December Industrial Production – Friday

 

1.  Geopolitical Moves – All Week

While the extreme tensions following the U.S. killing of a key Iranian general have subsided, tensions still remain. While official Iranian military actions may be sidelined for now, they have a roster full of proxy militias no doubt willing and able to conduct smaller-scale havoc. This is likely to keep a bid in Treasuries, especially as the December jobs report wasn’t as strong as expected. As we mentioned last week, investors waiting for the 10-year yield to push above 2.00% may continue to be frustrated as the flight-to-safety trade keeps yields under the 2.00% level. Meanwhile, Speaker Pelosi said she will transmit the Articles of Impeachment to the Senate this week, so that saga will return to the headlines. While Majority Leader McConnell has promised a speedy trial it’s still unclear when and how long the process will take. So far, the market has largely ignored impeachment news and with the likelihood of conviction almost nil, it’s not likely to generate large moves now but it could distract once the trial begins.

 

2.  December Retail Sales – Thursday

The consumer has mostly stood fast against all the trade and geopolitical headlines of the past several months and with the crucial holiday-selling season hanging in the balance, December retail sales are expected to show a nice uptick over what were modestly disappointing figures in November.  Expectations are for a 0.3% gain in overall sales versus 0.2% in November. Sales ex-autos & gas are expected to be even better at 0.4% versus 0.0% the prior month.  The Retail Sales Control Group (a direct GDP input) is expected to increase 0.4% versus 0.1% in November.  Thus, expectations are for a solid read on retail sales that improves on the somewhat tentative show in November.

 

3.  December Inflation Readings – Tuesday

Inflation as a prime driver of Fed policy has slipped in recent months as several officials have expressed the view that the 2% benchmark should be thought of as a symmetrical target such that with a long period below 2%, allowing it to move above 2% for a period of time without hiking rates is becoming more accepted. That being said, December CPI is expected to be another modest month as far as inflation is expected. Expectations for overall CPI are for an increase of 0.3%, matching the increase in November. The core rate (ex-food and energy) is expected to increase 0.2% matching the November increase. On a year-over-year basis, CPI is expected to increase from 2.1% to 2.4% while core CPI YoY is expected to remain unchanged at 2.3% for the third straight month and off the 2.4% high from August and September.   With the Fed’s preferred cost gauge, core PCE, currently at 1.6%, it looks like inflation will remain docile enough to allow the Fed to be patient with policy and remain in pause mode, well into 2020.

 

Key Inflation Measures

 

4.  Preliminary January Univ. of Michigan Consumer Sentiment Survey — Friday

With consumer consumption two-thirds of the economy, readings on consumer confidence are an early tell on future spending. If confidence readings start to trend lower it’s a warning that the consumer may be close to pulling back.  That being said, the preliminary January read from the University of Michigan on sentiment is expected to be solid at 99.3, matching the print in December. The high print was 101.4 in March of 2018 when tax cut euphoria was running high but the current level represents quite a rebound off the August 2019 low of 89.8.  The average over the past year has been 96.0, so an above -average reading is expected.  The also important inflation expectations are for 2.3% for the 1-year period and 2.2% for the 5-10yr horizon.

 

5.  December Industrial Production – Friday

The manufacturing sector has been mired in a slump for the last year as the uncertainties over the trade dispute with China weighed heavily on the sector. The December Industrial Production Report due Friday will be another look at how the sector is performing in the early days following the announced phase 1 trade deal with China. While the November numbers were upbeat, December’s are expected to be more modest with MoM down –0.1% versus 1.1% in November. Backing out the somewhat volatile utility sector, manufacturing is expected to decrease -0.1% in December compared to a 1.1% pop in the prior month. Thus, expectations are for positive gains but much more modest compared to the bounce in November.

 


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CenterState Disclosure

 


 

Tom Fitzgerald Signature 

Thomas R. Fitzgerald

Director, Strategy & Research

Tfitzgerald@centerstatebank.com

 

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