- House expected to pass 2020 spending bill today as Washington sleep-walks towards an eventual fiscal crisis
- Global stock markets hope for quieter US/China trade relations after phase-one agreementÂ
- U.S. manufacturing production expected to bounce back from GM strike
- U.S. housing starts expected to remain strong
House expected to pass 2020 spending bill today as Washington sleep-walks towards an eventual fiscal crisis — The House today is expected to pass the bipartisan spending bills needed to fund the government for the remainder of fiscal 2020 (i.e., through Sep 2020) and avert a U.S. government shutdown when the current continuing resolution expires this Friday. The Senate is then expected to pass the bills before leaving Friday for the holiday recess.
The White House has indicated that President Trump will sign the bills, although he hasn’t given his explicit approval, according to Politico. The spending bills provide for an unchanged level of wall spending at $1.4 billion, well below Mr. Trump’s demand for $8.6 billion. However, Congress compromised by not putting any new restrictions on President Trump’s ability to divert money from elsewhere to pay for his wall construction.
Once again, Washington is far outspending its incoming tax revenue. The federal budget deficit was $960 billion in fiscal 2019 and the CBO is forecasting an average annual budget deficit of $1.2 trillion between 2020 and 2029. That means that the markets can expect the U.S. national debt to grow by $1.2 trillion per year for at least the next 10 years, unless some fiscal restraint suddenly breaks out in Washington. The national debt is currently at $23 trillion, which is more than double the $9 trillion level seen before the Great Recession of 2007-09. According to current CBO projections, the national debt will soar to $35 trillion by 2029. Washington continues to sleep-walk its way towards an eventual fiscal crisis, which would be hastened by rising interest rates or a recession.
Global stock markets hope for quieter US/China trade relations after phase-one agreement — The global stock markets on Monday continued to react favorably to last Friday’s announcement of the US/China phase-one trade deal. The EuroStoxx 50 index on Monday rallied by +1.12% and posted a new 4-1/2 year high. The S&P 500 index rallied by +0.71% and posted a new record high.
China’s Shanghai Composite index on Monday closed +0.56%, adding to last Friday’s +1.78% rally. Chinese stocks on Monday were boosted by the trade deal and by stronger-than-expected Chinese economic data. China’s Nov industrial production rose by +6.2% y/y from Oct’s +4.7% and was stronger than expectations of +5.0%. China’s Nov retail sales rose by +8.0% y/y from Oct’s 7.2% and was stronger than expectations of +7.6%.
The phase-one trade deal was on the stingier end of what some market participants were hoping for since September’s 15% tariff on $120 billion of Chinese goods was only halved to 7.5% as opposed to hopes for a complete roll-back or a 50% cut in all tariffs. Nevertheless, the markets at least dodged the bullet from Sunday’s scheduled 15% tariff on the last $160 billion of Chinese goods, which would have hit U.S. consumer products hard and could have led to a cutback in U.S. consumer spending.
The biggest plus from the phase-one trade deal is the hope that President Trump in 2020 will hold his fire on any new tariffs since China agreed to nearly double U.S. ag purchases and since the two sides will be in phase-two trade discussions on technology transfers and industrial subsidies. The markets can at least hope that the worst of the US/China trade war might be over.
In the meantime, the markets will be closely watching Chinese ag purchases to see if they are large enough to satisfy President Trump. If not, then there is little doubt that Mr. Trump would be quick to reimpose new tariffs. China may have some difficulty finding enough economically-priced U.S. ag products to buy to meet its commitment of $40 billion per year in 2020 and 2021 since that is far higher than the 2017 level of $24 billion and the record high of $29 billion seen in 2013.
U.S. manufacturing production expected to bounce back from GM strike — The market consensus is for today’s Nov manufacturing production to rise by +0.8% m/m, more than reversing the -0.6% hit seen in October. October’s decline was due largely to the GM strike that lasted through Oct 25, although other sources of weakness included business equipment, construction supplies, business supplies, and non-energy materials. The overall Nov industrial production report is expected to rise by +0.8% m/m, exactly offsetting Oct’s -0.8% decline.
The U.S. manufacturing sector, in any case, remains in a recession. Manufacturing production was down by -1.5% y/y in October and was in negative year-on-year territory for the fourth consecutive month. The ISM manufacturing index has been below the expansion-contract level of 50.0 since August and the latest level of 48.1 in November was only 0.3 points above Sep’s 10-year low of 47.8.
U.S. housing starts expected to remain strong — The consensus is for today’s Nov housing starts report to show a +2.2% increase to 1.343 million, adding to Oct’s +3.8% increase to 1.314 million. Housing starts in October were in strong shape at only 4% below Aug’s 12-year high of 1.375 million units. The housing sector continues to see strength due to firm home demand and low mortgage rates. The current 30-year mortgage rate of 3.73% is only 24 bp above September’s 3-1/4 year low of 3.49%.
Meanwhile, U.S. homebuilders are in good shape with yesterday’s NAHB (National Association of Homebuilders) housing market confidence index rising sharply by +5 points to a new 20-year high of 76, the highest level since 1999. The SPDR S&P Homebuilders ETF (XHB) has soared by +41% on a year-to-date basis, easily outstripping the comparable year-to-date gain of +21% in the S&P 500 index.
