The Market Today
Iranian Tensions Ease, U.S. and China Set to Sign Phase One Deal
by Craig Dismuke, Dudley Carter
Vining Sparks Economic Outlook Webinar: We will host our first Economic Outlook webinar this morning at 10:00 a.m. CT. We will take a look back at the big stories of 2019, assess the current economic environment, and highlight some key risks to watch in 2020. To register, please click here.
Heavy Line-up of Fed Speakers: There are six Fed officials on the calendar to speak today. Fed Vice Chair Clarida spoke in New York this morning saying he believes monetary policy remains in a good place. He did note diminished downside risks since last summer but indicated that the improvement was insufficient to change their outlook. He, once again, spent a good amount of time addressing persistently low inflation and the various factors affecting that. Also on the calendar are Kashkari (voter, dove), Williams (voter, neutral), Barkin (non-voter, neutral), Evans (non-voter, dove), and Bullard (non-voter, dove).
Jobless Claims Drop Back to Pre-Holiday Range: Initial jobless claims for the week ending January 4 fell from 223k to 214k, now back in the 210k-220k range established from July through the beginning of November. Since November 8, new claims have averaged 224k per week and rose as high as 252k for the week ending December 6. It appears some of this end-of-year blip could be related to the late Thanksgiving and associated seasonal adjustments. History shows that late Thanksgivings tend to coincide with a period of elevated claims and weak December payroll reports. For this reason, we are skeptical that tomorrow’s payroll report will provide an accurate indication of how the labor market is performing.
Equity Markets Whipsawed By Iran’s Missile Attack: The 10-year yield fell as low at 1.70% overnight after Iran retaliated with a missile attack on Iraqi bases that were hosting U.S. troops, but had completely unwound that knee-jerk response before U.S. trading opened. Despite the escalation, subsequent reports showed Iran’s response was more limited than expected and resulted in no loss of American life. Markets later added to their earlier positive reversal after President Trump’s mid-morning address to the nation stressed America’s strength and vigilance and pledged new economic sanctions, but avoided any hints that further military action was imminent. The S&P 500, which had declined 1.7% overnight but recovered to up 0.2% before the address, increased its gain to 0.7% shortly after the president walked away from the podium. The index ended the day 0.5% higher.
Other Markets Saw Similarly Sharp Volatility: Away from equities, the 10-year yield moved from unchanged before President Trump’s remarks to up 5.6 bps by the close, ending the day at 1.87%. From trough to peak, the benchmark yield moved more than 17 bps, the third-largest move in a single day since the 2016 presidential election. The 2-year yield added 4.0 bps to 1.58%. After surging more than 4% overnight, U.S. WTI slumped back to close more than 4% lower, marking the commodity’s most volatile day since December 2018. Gold also erased a more-than-2% gain to finish down more than 1%.
Global Markets Again Recover from Geopolitical Scare: For a second time in less than a week, global markets followed the U.S.’s lead in recovering from a sharp risk-off response to geopolitical uncertainties in the Middle East. The MSCI Asia Pacific Index rallied 1.3% Thursday following Wednesday’s 0.8% sell-off in the aftermath of Iran’s retaliatory missile attacks. Europe’s Stoxx 600 had dropped as much as 0.6% after the attacks before recovering to close 0.2% higher yesterday, and has added another 0.3% midway through Thursday. Oil prices recovered 0.5% from Wednesday’s plunge, but U.S. WTI was holding under $60 per barrel for just a second day since mid-December. The Japanese yen and spot gold prices, two safe haven assets, also continued to weaken.
China Confirms Phase-One Trade Deal Will Be Signed Next Week: In other news, industrial production in Germany was stronger than expected in November and China’s Commerce Ministry confirmed a delegation from Beijing will travel to the U.S. early next week to sign the phase-one trade deal. According to the Ministry’s press briefing, China’s team, led by Vice Premier Liu He, will be in Washington for the first three days of next week, aligning with President Trump’s previous announcement that the deal will be signed on January 15th. Treasury yields, however, were unexcited by the news. At 7:30 a.m. CT, the 2-year yield was unchanged at 1.58% while the 10-year yield had inched 0.5 bps lower to 1.87%.