The Market Today
Phase One Trade Deal (in Principle), Brexit Path Gains Clarity with Strong Conservative Showing
by Craig Dismuke, Dudley Carter
Retail Sales Show Consumer Slowing with One Month of Holiday Shopping to Go: Retail sales rose less than expected in November, up 0.2% at the headline level. An increase in gas prices in November pushed up gasoline sales 0.7%, boosting the headline figure. Building material sales were unchanged. On a positive note, auto sales were up 0.5%, consistent with the strong auto sales data released last week. Excluding the volatile gas, building material, and auto sales categories; core retail sales rose a tepid 0.15%, the second weaker report than expected in a row. In the core figures, non-store retailers saw the biggest boost in activity, up 0.8% MoM. After two months of sales data and with one month of holiday shopping still to go, it appears the consumer has slowed activity in 4Q.
Inventories Look Positive in 4Q So Far: At 9:00 a.m. CT, the Business Inventories report will give us the final look at October inventories at all levels. After strength at the retail level, overall business inventories are expected to increase 0.2% for the month.
New York Williams to Discuss Monetary Policy: New York Fed Bank President Williams is scheduled to speak on monetary policy at 10:00 a.m. CT. There is likely too much uncertainty remaining surrounding yesterday’s Brexit and trade developments to affect a policymaker’s outlook.
Trade Developments Overshadowed ECB Decision and U.K. Election: While the ECB’s decision and U.K. parliamentary elections were expected to be Thursday’s big events, a flurry of trade developments quickly became investors’ greatest focus. Treasury yields and stocks rose sharply after a tweet from President Trump, minutes after U.S. equity markets opened, that read, “Getting VERY close to a BIG DEAL with China.” The subsequent gains were compounded by a Dow Jones report that said the U.S. had recently offered to cancel tariffs on roughly $150B of Chinese imports scheduled to take effect Sunday, and cut existing tariffs on roughly $360B of Chinese goods by half. According to the report, the offer was contingent on China agreeing to buy U.S. goods, including farm products, protect U.S. intellectual property, and open up its financial services sector. If China fails to follow through, the tariffs reduction would be reversed.
Further Indications of a Phase-One Trade Deal Pushed Yields Near Top of Five-Month Range: Markets were nudged higher again after lunch on a report that U.S. negotiators had reached a trade deal in principle with China and would head to the White House to discuss it with the president. After the S&P 500 closed up 0.9% and at a new record, a headline hit that President Trump had signed off on the deal. While Treasury yields showed little response to the final headline, the day’s cumulative move was significant. The 2-year yield rose 4.5 bps to 1.66%, its biggest move in over a month, while the 10-year yield jumped 10.1 bps to 1.89%, its third largest daily increase of 2019. Both finished near the high-end of their post-July trading ranges. Just after the U.S. Treasury market closed, the British Pound surged nearly 2% to its highest level against the Euro since June 2016 as exit polls projected PM Johnson’s Conservatives had secured a solid majority, strengthening his mandate to finalize his Brexit deal.
Sentiment Gets a Shot in the Arm from Reports of a Trade Deal in Principle: Positive turns within the last twenty four hours on two the of biggest global stories from the last couple of years have jolted global equities higher on Friday. News that the U.S. and China had reached a trade deal in principle that would cancel new tariffs set for this weekend and partially rolling back existing levies boosted sentiment. While sources have said President Trump has okayed the details of the first phase of what investors hope will be a broader agreement, the White House has not officially commented. In Beijing, a spokesperson for China’s Foreign Ministry would only say, “China is committed to constructive dialogue to resolve and manage our differences, and believe … the deal must be mutually beneficial,” when asked about a possible deal. The most recent headlines indicated that China still has issues with a firm agreement to preset levels of agricultural purchases, but has set a press conference to discuss the status of trade negotiations within the hour.
Brexit Breakthrough Adds to Optimism: Nonetheless, stocks roared upward across Asia with China’s CSI 300 near the front of the pack with a 2.0% gain, its best day since mid-August. While it has since given back some of its gains, China’s yuan strengthened more than 1%, the second sharpest rally of 2019, and remained stronger than 7 yuan per Dollar. The other big news overnight was the surprisingly-strong majority that PM Johnson’s Conservatives cemented in Thursday’s parliamentary elections. The results should break the gridlock that has left parliament unable to reach an accord on its withdrawal from the EU. While much remains to be decided, the British Pound is trading at a more-than-two-year high against the Euro on hopes negotiators can now move on to discussing details of the future relationship. Before this morning’s retail sales data, U.S. equity futures were up 0.2% while Treasury yields had edged back after yesterday’s strong gains. The 2-year yield was 2.8 bps lower before the report while the 10-year yield had dipped 1.2 bps.