- Weekly market focus
- U.S. stocks on Monday rally on Trump claims of “big progress” on US/Chinese trade deal
- Market adopts pessimistic economic view for 2019 with no Fed rate hikes
- U.S. government shutdown awaits resolution by the new Congress
Weekly market focus — The U.S. markets during the remainder of this holiday-shortened week will focus on (1) the prospects for ending the partial U.S. government shutdown when the new Congress takes control on Thursday, (2) US/Chinese trade tensions after President Trump this past weekend said that “big progress” is being made on a trade deal, (3) Fed policy and whether the market is right to have reduced the chances for a rate hike in 2019 to zero, (4) any new comments by President Trump about Fed Chair Powell or interest rates, (5) crude oil prices, which stabilized late last week after posting a 1-1/2 year low last Monday, and (6) whether the extreme stock market volatility continues this week during the thin holiday markets.
In Europe, the focus will on (1) bond yields now that the ECB’s QE program has ended, and (2) CPI data late this week. The markets will watch Italian politics after weekend Italian newspaper reports said that Finance Minister Tria will resign in January after Italy’s torturous 2019 budget process. The markets will also focus on Brexit ahead of the planned vote in two weeks in the week of January 14 on Prime Minister May’s separation plan.
In Asia, the Chinese and Japanese stock markets were closed on Monday and Tuesday for the New Year’s holiday and the Japanese markets will remain closed on Wednesday. The Chinese stock market today will therefore have its first chance to react to the positive weekend Trump news on the US/Chinese trade talks and the mixed Chinese PMI reports. On Sunday, China’s national Dec manufacturing PMI fell by -0.6 points to a 2-3/4 year low of 49.4 (weaker than expectations of unch at 50.0) but the non-manufacturing PMI rose by +0.4 points to 53.8 (stronger than expectations of -0.2 to 53.2). The Caixin Dec manufacturing PMI on Tuesday night was expected to be unchanged at 50.2 and the services PMI on Thursday night is expected to fall -0.8 points to 53.0.
U.S. stocks on Monday rally on Trump claims of “big progress” on US/Chinese trade deal — The S&P 500 index on Monday closed the day with a solid gain of +0.85% in a rally sparked by President Trump’s weekend comments that he had a long telephone call with Chinese President Xi and that “big progress” is being made on a trade deal.
A U.S. trade delegation of mid-level officials, led by Deputy USTR Gerrish, will travel to Beijing next week for trade talks. Those will be the first face-to-face trade talks since Presidents Trump and Xi on Dec 1 agreed to a 90-day ceasefire, although there have recently been a series of telephone calls about trade. There is little time to lose because the 90-day ceasefire that ends March 1 is already a third over.
The odds for a US/Chinese trade deal seem to have improved because China has taken a number of measures to placate the U.S. such as buying U.S. soybeans and LNG, passing stronger IP enforcement penalties, dropping the penalty tariff on U.S. autos, implementing a third round of cuts in import and export tariffs in an economy-opening initiative, and expressing some willingness to water down its “Made in China 2025” industrial program.
Meanwhile, the Trump administration’s hand has weakened due to December’s sharp sell-off in the U.S. stock market. The S&P 500 index in December fell by -9.2%, which is significantly more than December’s -3.6% sell-off in the Shanghai Composite index.
Market adopts pessimistic economic view for 2019 with no Fed rate hikes — The federal funds futures market in the past week reduced expectations for a rate hike in 2019 to zero due to December’s sharp stock market correction and talk about a recession. The Dec 2019 federal funds futures contract is discounting a -0.5 bp lower funds rate than the current effective funds rate of 2.40%, which translates to a zero chance of a rate hike in 2019. Not only is the market expecting no rate hikes in 2019, the market is discounting a 90% chance of a rate cut in 2020.
By contrast, the Fed-dots are still forecasting two rate hikes in 2019 and one rate hike in 2020, which is far more hawkish than the market. The Fed will not halt its rate-hike regime just because of weakness in the stock market. For the Fed to halt its rate hike regime, the U.S. economy would have to weaken to a GDP rate of below the potential rate of +1.9%. Yet the market consensus at this point is for GDP growth to remain solid at +2.6% in 2019.
U.S. government shutdown awaits resolution by the new Congress — The U.S. government has been partially shut down since Dec 22. President Trump on Tuesday called for a meeting today at the White House of top Congressional leaders for a briefing on border security, which could turn into a negotiating session if the meeting occurs.
In any case, the new Democratically-controlled House on Thursday is expected to pass bills to reopen the government including a continuing resolution until Feb 8 for the Department of Homeland Security and spending bills for the remainder of the fiscal year covering the other agencies that are currently closed. None of those bills will include any funding for President Trump’s wall, although the bill will likely include the $1.3 billion in border security that was included in the previous bipartisan continuing resolution.
Once the House passes its funding bill, then the ball will be in Senate Majority Leader McConnell’s court. However, Mr. McConnell has said that the Senate will not vote on a bill until there is a bipartisan agreement between the White House and Democrats that can get 60 votes in the Senate for cloture. At some point, either the White House or Congressional Democrats, or both, will have to blink in order to reopen the government. In the meantime, the partial U.S. government shutdown is putting a dent in the U.S. economy and is undercutting investor confidence.