The Market Today

U.S. and China Sign Phase One Deal; Fourth Quarter Retail Sales Data Disappoint


by Craig Dismuke, Dudley Carter

TODAY’S CALENDAR

December’s Retail Sales Disappoint Expectations for Holiday Sales Bounce: Retail sales were softer than anticipated in December due to lower revisions to October’s and November’s sales figures.  October’s core sales were initially reported at +0.3% MoM but were revised down to +0.0%.  November’s were +0.1% MoM but were revised down to -0.1%.  As such, sales through the first two months of the 4th quarter went from being up 0.4% versus 3Q to down 0.1%.  On a positive note, December’s sales did jump 0.5%, but remained almost 0.4% below the expected total coming into the month. Building material sales were encouraging, up 1.4% MoM and likely the beneficiary of a warmer-than-normal December.  Auto sales disappointed falling 1.3%.  Interestingly, non-store retailers (online) saw particularly weak results while consumers focused on electronics/appliances, health/personal care, clothing, and sporting goods.  Regardless of the detail, the core sales figure is the focus and shows a softer than expected holiday shopping season.  Personal consumption was expected to be up 2.0% in 4Q but now appears to have grown closer to 0.5%.  This will pull lower economists’ projections for 4Q GDP.  The data is obviously subject to sizeable revisions, but the initial report on consumer activity at year-end is not encouraging.

Philadelphia Fed Index Handily Beats Expectations: The Philadelphia Fed’s Business Outlook Index has been beat up over the last couple of years, but was much stronger than expected in January. The index surged more than 14 points to start 2020, from 2.4 to 17.0, an eight-month high and the second best result since late in 2018. The index peaked near 40 in early 2017 but has steadily declined ever since to December’s level of 2.4. In addition to the stronger assessment of current conditions, the outlook for six months from now also improved to a 20-month high. Giving more credence to the strong headline readings, most of the key underlying details improved from December. The upbeat results stand in contrast to and will help partially offset a more downbeat sentiment from yesterday’s Beige Book, which described activity in recent weeks in the Philadelphia Fed District as “sub-par.”

Upward Effect of Late Thanksgiving Skew Continues to Fade from Jobless Claims Data: Initial jobless claims remained low during the week ended January 11, offering further evidence that the unusual and unexpected spike above 250k in early December was the result of a statistical skew in the seasonal adjustment caused by a late Thanksgiving. Initial jobless claims fell 10k unexpectedly last week, from 214k to 204k, marking a six-week low for initial claims and the second best reading since April. As a result of the weekly decline, the four-week average continued to work its way back down toward its healthier pre-Thanksgiving range. The moving average dropped from 224k to 216k, a ten-week low. While most evidence shows the labor market has continued to slow from a strong 2018 pace, the low claims level signals it remains strong more than 10 years into the economic expansion.

Homebuilder Confidence and Business Inventories: At 9:00 a.m. CT, January’s homebuilder confidence report is expected to pull back from December’s strong report, the highest level reported since 1999.  Also at 9:00 a.m., the November business inventory report is expected to show a 0.2% drop in inventories.


YESTERDAY’S TRADING

The U.S. and China Finally Signed the Phase One Trade Agreement: Wednesday was an active day on Wall Street and in Washington as the U.S. and China signed the first phase of a trade agreement nearly simultaneously with the House passing a resolution to send the pending impeachment case to the Senate. Stocks had risen to record levels by the time President Trump and China’s Vice Premier Liu He entered the ceremony set in the East Room of the White House. Anxious investors were forced to wait a bit longer than expected for the long-awaited deal to be signed, as the president individually thanked a long list of lawmakers and business leaders that were in attendance for what he described as a “momentous step…toward a future of fair and reciprocal trade.”

Markets Bought the Rumor, But Slept on the News: As the final deal was penned and the details of the 94-page, eight-chapter agreement were released, stocks trimmed their gains and Treasury yields avoided a perceptible response. While the deal included chapters on the hot topics of intellectual property rights and forced technology transfers, top U.S. officials have previously said most of the heavy lifting on those areas will be saved for the second round of negotiations. Instead, the major focus of most headlines was the increased purchases of goods and services as described in Annex 6.1. In exchange for the U.S. reducing tariffs on $120B of goods, China agreed to purchase roughly $200B of additional U.S. products and services over a two-year period, spread out across manufactured goods ($77.7B), agriculture ($32B), energy ($52.4B), and services ($37.9B).

Stocks Pared Gains But Held Records: Eyeing the crop markets, futures for corn and soybeans both declined despite the agreement. While it finished off the highs, the S&P 500 rose 0.2% to close in record territory alongside the Dow, which closed above 29,000 for the first time ever. Treasury yields were unexcited by the trade deal signing as longer yields declined to lead the curve lower and flatter. The 2-year yield fell 1.4 bp to 1.56%, remaining locked in a tight three-month range between 1.53% and 1.67%. The 10-year yield slipped slightly more, dropping 2.6 bps to close at 1.79% and just below the middle of its three-month range between 1.69% and 1.94%. Away from the trade news, European yields served as a drag after U.K. yields tumbled on more weak inflation data and dovish commentary that increased market expectations for the Bank of England to ease policy soon.


OVERNIGHT TRADING

Markets Don’t Do Much After U.S. and China Sign Their Trade Deal: A positive global market response to yesterday’s signing of the U.S.-China trade deal has been subdued to simply nonexistent. Likely exhibiting some buy-the-rumor-sell-the-news effects, global equities, which were pushed up to record levels in the weeks leading up to yesterday’s official event, have struggled to add to those gains on Thursday. China’s CSI 300 dipped 0.4% amid a mixed performance elsewhere in Asia and Europe’s Stoxx 600 was hovering around unchanged at 7 a.m. CT after erasing an opening move higher.

Yields Continue Their Drift Lower: Yields across Europe continued to drift down with 10-year yields in Germany and the U.K. roughly 2 bps lower. The ECB’s December Minutes were released to little fanfare, but showed officials saw “some initial signs of stabilization in the growth slowdown” and discussed the need for “vigilance” in monitoring “possible side effects of the present monetary policy measures,” a likely reference to negative interest rates. Ahead of Thursday’s influx of economic data, including this morning’s retail sales report, the Treasury curve looked little different. At 7:15 a.m., the 2-year yield was unchanged while the 10-year yield had pulled back 0.9 bps.


NOTEWORTHY NEWS
Not Much Changed in the Fed’s “Modest” January Beige Book:
January’s Beige book said the modest pace of expansion continued across most Districts, although some experienced a stronger pace than others. Encouragingly, “a number of Districts not[ed] some pickup from the prior period” in consumer spending and holiday sales were broadly described as “solid.” Manufacturing output was characterized as “essentially flat” while services activity was said to be “mixed but, on balance, growing modestly.” Relevant to Wednesday’s signing of the phase one trade agreement, “tariffs and trade uncertainty continued to weigh on some businesses,” while the overall outlook “remained modestly favorable.” The labor market was again described as “tight” and worker shortages were partly to blame for slower hiring, but there continued to be no discussion of additional wage acceleration. Price pressures, or inflation, continued to be described as “modest.” As with most other recent data, the latest Beige Book included nothing that should affect the Fed’s plan to hold rates steady in 2020.

WSJ – The Era of Fed Power Is Over. Prepare for a More Perilous Road Ahead. (Grep Ip): “The Federal Reserve and other central banks have long been the unchallenged drivers of financial markets and the business cycle. … That era is drawing to a close. In many countries, interest rates are so low, even negative, that central banks can’t lower them further. Tepid economic growth and low inflation mean they can’t raise rates, either. .. But with interest rates now stuck around zero, central banks are left without their principal lever over the business cycle. The eurozone economy is stalling, but the European Central Bank, having cut rates below zero, can’t or won’t do more. Since 2008, Japan has had three recessions with the Bank of Japan, having set rates around zero, largely confined to the sidelines. … The U.S. might not be far behind. ‘We are one recession away from joining Europe and Japan in the monetary black hole of zero rates and no prospect of escape,’ said Harvard University economist Larry Summers. The Fed typically cuts short-term interest rates by 5 percentage points in a recession, he said, yet that is impossible now with rates below 2%. … Workers, companies, investors and politicians might need to prepare for a world where the business cycle rises and falls largely without the influence of central banks.”


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