Deal or no deal

Deal or no deal.  In a news filled day, stocks rallied on Friday driven by an interim agreement between the US and China.  Consumers remain confident and the Fed wants us to know that they still have our backs.

 

MY TWO CENTS

 

1.  Yuan a deal?  On Friday, President Trump announced a “phase one” trade deal with China.  The “substantive” deal, as he put it, would include the US agreeing not to increase a tariff on $250 billion in Chinese imports by +5%.  China agreed to buy between $40 and $50 billion in agricultural products from the US.  And that is pretty much… it.  When the President announced the deal about 15 minutes before the markets closed on Friday, the Dow Jones spiked as much as 500 points before falling into the close as traders were looking for pages 2 through 6 of the deal, wondering if their printers were jammed.  The Dow still managed to close up by +1.51% in response to the seemingly positive news.  I have been saying that any deal would be good for the markets, even a partial one, as the trade war is risk #1 on just about everyone’s list these days.  The big question remains: do we have a deal or not?  First of all, based on Friday’s announcement, all existing tariffs would remain in effect with the only new development being the curbing of the next level-up tariffs due to kick in tomorrow.  Second of all, China will be buying US pork and soybeans.  Good news for US farmers who have really taken the trade war on the chin.  Good news for China also as they are desperate to meet demands for the agricultural products.  China relies heavily on soybean imports and their domestic pork production has been ravaged by the European Swine Flu.  Seems like a very practical deal for China.  The two sides will work on putting the “phase 1” deal in writing over the next few weeks with hopes of both sides signing at the APEC summit next month in Chile.  But wait, WHILE YOU SLEPT, China announced that it would like to have some more talks before President Xi signs it.  Though the announced deal seems somewhat minimal, it does represent a positive move forward and, perhaps, a cooling off of tensions that have arisen between the two countries… assuming it gets signed.

 

2.  Buy me to the moon.  Favorite topic number one for me: the consumer.  A healthy consumer means a healthy economy.  The US consumer has certainly been healthy, really the driving force behind this economic expansion.  Consumption is being driven by low unemployment, low inflation, and low borrowing costs.  Almost a Goldilocks scenario for consumption.  That is why I, along with many of my fellow economists, are so obsessed with consumer confidence, because despite the ripe economic environment, consumers will stop consuming if they are spooked.  So far they appear to be vigilant but still confident.  On Friday, the University of Michigan Sentimentindicator came out at 96.0, beating expectations, at its highest level in 3 months.  Last month’s reading was 93.2, so the latest number shows that consumers are optimistic about the recent developments in trade talks and that they are unfazed by the political drama unfolding in the nation’s capital.  We will get another read on the consumer later this week with the release of Retail Sales,which have also remained resilient.

 

THE MARKETS

 

Stocks rose on Friday as an interim trade deal was reached between the US and China, amidst a good amount of tweeting and press conferencing.  Also in Friday’s session, a consumer confidence number showed that sentiment remains healthy and the Federal Reserve announced a rather aggressive plan to buy treasuries in the open market.  The S&P500 rose by +1.09%, the Dow Jones Industrial Average climbed by +1.51%, the Russell 2000 advanced by +1.79%, and the NASDAQ Composite Index traded up by +1.34%.  Bonds sold off along with safe havens and 10-year treasury yields climbed by +6 basis points to 1.72%.  Crude oil jumped by +2.15% in response to the rocket attack on an Iranian tanker in the gulf.

 

WHAT’S NXT

 

– This week’s economic releases include Retail Sales, NAHB Housing Market Index, the Fed Beige Book, Building Permits, some regional Fed reports, and the Conference Board’s Leading Index.  Please refer to the attached economic and earnings release calendars for details.

– Corporate earnings season kicks off this week with 50 S&P500 companies expected to release their Q3 earnings results.  Banks will kick things off starting tomorrow.

– Cash treasury markets are closed today for Columbus Day.

daily chartbook 2019-10-14

earnings releases 10_14

econ numbers 10_14