Summary and Price Action Rundown
Global risk assets remain buoyant in quiet pre-holiday trading this morning, while the recent uptrend in sovereign yields is pausing after some mixed US economic data. The S&P 500 is slightly higher bringing the index to a new record peak with year-to-date gains of nearly 29%. Equities in Asia and the EU were mixed overnight, with mainland Chinese stocks underperforming as analysts cite reports that a state-linked investment fund is cutting its stake in tech local tech companies. Additionally, Boeing stock is up 2.6% after the announcement of a change of the company’s CEO. An uptrend in sovereign yields has been one area of clear directionality in markets this month, with the 10-year Treasury yield breaking above its multi-month range and now hovering at 1.91%. Still, the dollar is finding little support from the rising rates, while the pound is extending its losses amid reemergent concerns over Brexit and a string of dismal UK growth indicators. Oil prices are dipping further below six-month highs, around $66 per barrel for Brent crude.
Barring market volatility, our next brief will be midday tomorrow – Happy Holidays!
Mixed US Data Caps Upside for Treasury Yields
Though longer-dated Treasury yields reached their highest levels since mid-year last week amid expectations for building economic momentum into next year, the uptrend has remained stalled today amid some softer US economic readings. US Durable Goods Orders dropped 2.0% month-on-month (m/m) in November, dramatically undershooting expectations of a 1.5% increase. Demand for transportation equipment led the miss, falling 5.9%, led by both defense (down 72.7%) and civilian aircraft (down 1.8%). Orders for non-defense capital goods excluding aircraft, a closely watched indicator for future business spending plans, gained 0.1% m/m. Excluding transportation, new orders were unchanged and excluding defense, new orders advanced 0.8%. New Home Sales were more upbeat, rising 1.3% m/m to a seasonally adjusted annual rate of 719K in November 2019, bouncing back from a 2.7% drop in October and easily beating market expectations of a 0.3% fall. Year-on-year (y/y), sales jumped 16.9%. Housing experts are citing lower mortgage rates for the recent strength in the overall housing market. Amid the mixed data, Treasury yields are struggling to find direction. For context, the recent uptrend in yields stalled on Friday despite solid November data, including upside surprises for Personal Income, Personal Spending and Core Personal Consumption Expenditures (PCE) Price Index, which is the Fed’s preferred measure of inflation with a 2% target. Year-on-year, Core PCE rose 1.6%, easing from 1.7% in October and just beating market expectations of 1.5%.
Additional Trade Concessions Support Sentiment
Although trade developments are more of a backburner issue for investors now that a US-China Phase One deal is ostensibly complete, headlines over the weekend that China is unilaterally reducing more tariffs on various imports are said to be underpinning the ongoing year-end rally. Reports over the weekend indicated that Beijing is set to reduce duties on imported pork, some tech devices, and various other items. For context, investors expect US-China trade friction to ease meaningfully in the coming year, with the finalization of the interim trade agreement and slow-moving Phase Two negotiations, which is a primary factor supporting broad optimism for an impending global growth rebound. News on Friday that President Xi is skipping the World Economic Forum in late January doused hopes that Davos would be the venue for a trade deal signing summit with President Trump, but markets exhibited no adverse reaction. Treasury Secretary Mnuchin indicated last week that the text of the deal is undergoing final legal review on both sides and will be disclosed to the public and signed in early January. Also, the House of Representatives passed the US-Mexico-Canada (USMCA) trade agreement Thursday afternoon, as was widely expected, eliciting no discernable asset price reaction.
Additional Themes
Oil Prices Pressured by Saudi/Kuwait Compromise – News that the Saudi and Kuwaiti governments are nearing an agreement that would allow production to restart in a neutral area between the two countries is weighing on crude prices today. The potential supply from the region, which has been restricted due to disagreements between the two countries, is estimated at up to 500k barrels per day. For context, Brent crude is trading near a six-month high after additional OPEC production cuts were announced earlier this month and improving global growth expectations have brightened traders’ outlook for oil demand.
Pound Extends Weakness – The pound remains under pressure, now posting losses of 3.1% versus the dollar since the day after the UK general election amid the resurgence of “hard” Brexit risk at the end of next year and a series of dismal economic readings. The announcement of Governor Carney’s successor at the Bank of England did little to change policy expectations.