Weekly global market focus — The U.S. markets this week will focus on (1) the US/Chinese trade talks, which are coming down to the wire ahead of this Sunday’s (Dec 15) deadline when President Trump plans to slap a 15% tariff on the remaining $160 billion of Chinese goods, (2) the Tue/Wed FOMC meeting, which is unanimously expected to leave policy unchanged, (3) this week’s key U.S. economic data, which includes Wednesday’s CPI report (core CPI expected unchanged at +2.3% y/y) and Friday’s Nov retail sales report (expected +0.4% and +0.3% ex-autos after Oct’s +0.3% and +0.2% ex-autos), (4) the Treasury’s sale of 3-year, 10-year and 30-year securities, and (5) earnings reports from five of the S&P 500 companies including Adobe, Oracle and Costco on Thursday.
Washington politics will be in the news this week as the House Judiciary Committee today holds another impeachment hearing. House Speaker Pelosi still seems to be aiming for a House impeachment vote before the Christmas recess. The markets will also watch for progress on spending legislation since there will be a U.S. government shutdown if Congress doesn’t pass a new spending bill when the current continuing resolution expires next Friday (Dec 20).
The markets will continue to closely watch the USMCA talks that are scheduled to resume today. US Trade Representative Lighthizer is trying to work out revisions with Mexico to the treaty that will convince House Speaker Pelosi to push the bill through the House.
In Europe, the focus will be mainly on Thursday’s ECB meeting, the 2-day EU Summit that begins on Thursday, and Thursday’s UK general election. EU leaders at their summit are expected to discuss deeper EU integration, Brexit, and the EU budget.
The ECB is unanimously expected to leave its policy unchanged at its meeting on Thursday, but the markets will watch how Christine Lagarde handles her first press conference as ECB President. Ms. Lagarde is expected to announce the launch of a strategic review of the ECB’s monetary policy, perhaps taking into account the opposition by some ECB members for the QE restart on Nov 1.
Thursday’s UK general election will be critical for Brexit. The Conservatives are ahead of Labour in the polls by about 10 points and the betting odds are now at 95% (oddschecker.com) that the Conservatives will take a majority of seats in the new Parliament. Prime Minister Johnson claims that all the Conservative Party members standing in Thursday’s election have committed to passing his Brexit withdrawal bill. That means that if the Conservatives win a solid majority in Thursday’s election, PM Johnson should be able to easily get the new Parliament to approve his Brexit bill before the January 31 Brexit deadline, thus eliminating the possibility of a no-deal Brexit and ushering in a transition period until the end of 2020.
In Asia, the Chinese markets today will react to Sunday’s negative news that Chinese Nov exports fell by -1.1% y/y, which was weaker than expectations of +0.8% and illustrated how the Chinese economy is suffering from the US/Chinese trade war and weak global economic growth in general. Chinese exports to the U.S. fell sharply by -23% y/y.
The Chinese markets this week will focus mainly on the US/China trade talks ahead of Sunday’s tariff deadline. The markets remain optimistic about a deferral of the tariff, if not an actual phase-one trade agreement before Sunday’s deadline. However, that also means that the markets could drop sharply if President Trump this Sunday surprises the markets and goes ahead with his new tariff.
There were large protests again in Hong Kong over the weekend, ensuring that the protests will continue to be a friction point with the United States. The U.S. House last week passed a bill calling for sanctions on Chinese officials involved with any human rights violations against the Uighurs, and the Senate is expected to pass the legislation within the next two weeks. China also continues to threaten to release an “unreliable entities” list that would involve sanctions against some U.S. companies.
Japan’s parliament today is expected to approve the first-stage US/Japanese trade deal before its legislative session ends. The trade deal reduced US/Japanese trade tensions, but Japan was unable to extract an iron-clad promise from President Trump not to impose tariffs on Japanese autos.
3-year T-note auction to yield near 1.64% — The Treasury today will sell $38 billion of 3-year T-notes. The Treasury will then continue this week’s $78 billion coupon package by selling $24 billion of reopened 10-year T-notes on Tuesday and $16 billion of reopened 30-year T-bonds on Thursday, leaving Wednesday clear for the announcement of the FOMC meeting results.
The 3-year T-note yield last Friday rose to a 2-week high due to the strong Nov payroll report of +266,000 (+225,000 ex returning GM strikers) and closed the day up +3 bp at 1.64%. The 3-year T-note yield is trading in the upper half of the narrow range seen since August.
The 12-auction averages for the 3-year are as follows: 2.50 bid cover ratio, $64 million in non-competitive bids, 3.2 bp tail to the median yield, 28.0 bp tail to the low yield, and 61% taken at the high yield. The 3-year is the least popular security among foreign investors and central banks. Indirect bidders, a proxy for foreign buyers, have taken an average of only 47.1% of the last twelve 3-year T-note auctions, well below the average of 60.8% seen for all recent coupon auctions.