Summary and Price Action Rundown
Global risk assets were mixed overnight as investors consolidate stellar 2019 gains before year-end while monitoring incoming signals on global growth, Brexit, and US politics. S&P 500 futures point to a slightly lower open, which would put the index just below yesterday’s record peak with year-to-date gains of over 27%.
After last week’s decisive developments on the US-China trade front and in UK politics, as well as a recent string of firmer growth figures from the US and China, investors may be looking to take some profits into year-end, particularly as they note lingering uncertainties on each of these fronts for 2020 (more below). Equities in Asia retreated moderately overnight while EU stocks are a bit higher. Treasuries are mildly bid, with the 10-year yield remaining within its multi-month range at 1.87%. The dollar is reversing some of its recent depreciation, as reemergent concerns over Brexit continue to weigh on the pound. Oil prices are dipping below six-month highs ahead of US crude stockpile data.
Steady Fed Policy Outlook Amid Improving US Economic Data
The recent array of solid US economic releases has helped support investor expectations for a broad acceleration in economic activity in 2020, but Federal Reserve communications continue to convey a cautious “wait and see” approach. The strength of the US housing market was on display again yesterday, as November tallies of building permits and housing starts both handily topped expectations. This followed Monday’s robust reading of the NAHB Housing Market Index, which jumped to 76 in December, the highest reading since June of 1999. Last month’s industrial production also accelerated, bouncing back to 1.1% month-on-month versus a forecast of 0.9% and October’s -0.9%. This comes after Monday’s preliminary US purchasing managers’ indexes (PMIs) for December were generally stable and in-line with expectations, reflecting continued moderate growth. Later this week, analysts will focus on December personal spending and income data, as well as core personal consumption expenditure prices (core PCE), the Fed’s preferred measure of inflation. These readings are expected to show moderate improvement, although core PCE is projected to edge lower from 1.6% in October to 1.5% last month, falling further below the Fed’s 2% target. Despite the increasingly solid tone of US economic data over recent weeks, yesterday’s remarks from Boston Fed President Rosengren and Dallas Fed President Kaplan both tended to concentrate on downside risks to their forecasts, though they characterized the policy outlook as steady. Futures markets continue to reflect meaningful odds of a return to Fed rate cuts next year, suggesting a dour outlook that contrasts with economist consensus for modest reacceleration.
Brexit Uncertainty and Downbeat Data Dent the UK Pound
News that Prime Minister Johnson is seeking to establish a hard end-2020 deadline for the Brexit transition period, rekindling risk of a disorderly exit from the EU, and a series of dismal economic readings highlight the challenges still facing the UK. The pound is extending its week-to-date losses to 1.8% versus the dollar as the abrupt reemergence of headwinds are driving partial retracement of the UK currency’s 9% rally since August. Analysts note that the government’s proposed legislation would reintroduce the risk of a disorderly UK divorce from the EU by mandating that the transition period, during which a new EU/UK trade agreement is to be hammered out, conclude at the end of next year regardless of the state of negotiations. The European Commission’s Director General for Trade warned that imposition of such a deadline would risk a “cliff-edge situation” next December. Meanwhile, yesterday’s readings of UK job vacancies and wage growth were softer than expected while Monday’s releases of preliminary December purchasing managers’ indexes for both the manufacturing and service sectors undershot expectations and reflected a deepening contraction in activity. Although analysts note that today’s consumer price inflation data for November was slightly firmer than expected, it remained low at 1.5% year-on-year. Futures markets assign a 50/50 chance of a rate cut by the Bank of England by next summer, but the choice of Governor Carney’s successor, who will take the helm in February next year, could alter those odds.
Additional Themes
Markets Unmoved by US Impeachment – Consistent with the prevailing trend over recent months, US political intrigue over President Trump’s possible impeachment by the Democrat-led House of Representatives is having no discernable impact on financial market price action today. The House is set to adopt the two articles of impeachment later today, but investors see negligible odds that the Republican-controlled Senate will remove the President from office.
FedEx Cuts Outlook – Shares of the shipping giant are down 7.4% in pre-market trading after management once again downgraded their 2019 earnings forecasts, citing weakness in international demand among other factors. This comes a day after consumer bellwether Unilever cut its sales projections, raising questions about the outlook for global demand.