Global equity markets continued to surge higher this past week as progress was announced toward resolving two major geopolitical disputes weighing on global markets, the U.S.-China trade conflict and Brexit. The S&P 500 once again notched new record highs after returning 0.8% for the week, while the Dow and Nasdaq Composite gained 0.5% and 0.9%, respectively. Foreign equity markets rose even further with the MSCI All Country World ex-U.S. index returning 2.2%. Meanwhile, bond yields temporarily swung higher as the U.S. and China announced a phase-one trade agreement but slid back down to close the week as investors tempered expectations while they await concrete details of the completed deal. The U.S. 10-year Treasury yield closed at 1.82%, down slightly from 1.84% in the week prior.
Although investors cheered the announcement of the completed U.S. and China phase-one trade deal late last week, neither side has released specific details of the 86-page agreement and there may still be a long way to go on fully resolving the issues at the heart of the dispute. U.S. officials have stated that China will increase purchases of American products and services by at least $200 billion over the next two years, including a $32 billion increase in U.S. agricultural product exports. Such an increase would nearly double U.S. annual exports to China, but these hard targets have not yet been confirmed by Chinese officials. U.S. Trade Representative Robert Lighthizer also noted that the deal includes improved intellectual property protections such as stipulations to curb forced technology transfer for foreign companies doing business in China.
In return for the trade concessions from China, the U.S. has suspended tariffs on $156 billion of Chinese consumer goods imports that were planned to go into effect on December 15th and has reduced existing tariffs that were implemented on September 1st on $120 billion of Chinese goods from 15% to 7.5%. Additional U.S. tariffs of 25% on $250 billion of Chinese goods will remain unchanged for the time being.
Foreign equity markets got a further boost on Friday after an emphatic victory for U.K. Prime Minister Boris Johnson’s Conservative Party in the Parliamentary general elections. The victory removed an obstacle to Johnson’s efforts to complete the British exit from the European Union, though challenges remain in nailing down a long-term trade deal.
The geopolitical news overshadowed a relatively uneventful Federal Reserve meeting where the Fed kept its target policy rate unchanged at 1.50% to 1.75% as anticipated and indicated no intentions of raising rates in the near-term in the absence of persistent inflation. Market participants will get an updated look at Personal Consumption Expenditures (PCE), the Fed’s preferred inflation gauge, in the week ahead, as well as new domestic consumer data following a disappointing retail sales report last week.
Retail Sales: U.S. retail sales came in weaker than expected in November as the Commerce Department reported 0.2% sales growth over the prior month compared to the consensus expectation for 0.5% growth. Department store sales were particularly weak, but part of the blame has been attributed to Thanksgiving being very late in the November and delaying some holiday shopping.
Inflation: The Consumer Price Index (CPI) ticked up to 2.1% year-over-year in November, up from 1.8% in October and slightly stronger than consensus of 2.0%. Core inflation (excluding the volatile food and energy components) grew at 2.3% year-over-year.
US Economy – The Week Ahead
- Housing Starts – Consensus Estimate: 1,340K (1.2% MoM), Prior Month: 1,314K (3.8% MoM)
- Industrial Production (Month-over-Month growth) – Consensus Estimate: 0.8%, Prior Month: -0.8%
- Job Openings & Labor Turnover Survey – Consensus: 6,975K (-0.7% MoM), Prior Month: 7,024K (-3.8% MoM)
- Initial Jobless Claims – Consensus Estimate: 222,500 (-11.7% WoW), Prior Week: 252,000 (24.1% WoW)
- Existing Home Sales – Consensus Estimate: 5,430K (-0.6% MoM), Prior Month: 5,460K (1.9% MoM)
- Leading Economic Indicator Index (Month-over-Month) – Consensus Estimate: 0.1%, Prior Month: -0.1%
U.S. 3Q 2019 GDP Growth Year-over-Year (Final) – Consensus Estimate: 2.1% (2.1% QoQ), Prior Quarter: 2.3% (2.0% QoQ)
Personal Consumption Expenditures (PCE) Index Year-over-Year – Consensus Estimate: 1.5%, Prior Month: 1.3%
University of Michigan Consumer Sentiment Survey (Final) – Consensus Estimate: 99.2 (2.5% MoM), Prior Month: 96.8 (1.4% MoM)