Summary and Price Action Rundown
Global risk assets are steady in placid 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 edging below yesterday’s new record peak as investors consolidate year-to-date gains of nearly 29% for the index. Equities in Asia and the EU were mostly higher overnight. Amid the brighter outlook for global trade, ultra-easy policy settings by major central banks, and relatively steady economic data, market participants are expecting an uneventful holiday trading period and an upbeat start to the new year. The uptrend in sovereign yields over the past few weeks has been one area of clear directionality in markets, with the 10-year Treasury yield breaking above its multi-month range but its momentum has stalled around 1.92%. Meanwhile, the dollar continues to tread water in the middle of its 2019 range while the pound has stabilized after its recent swoon, which was due to renewed Brexit risks and poor UK economic data. Oil prices are turning higher again to return to nearly six-month highs, around $67 per barrel for Brent crude.
Barring market volatility, our next brief will be on Monday, December 30th – 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 stalled this week following some softer US economic readings. This morning’s December reading of the Richmond Fed’s regional manufacturing gauge posted a downside surprise, relapsing to -5, its weakest level since September, instead of improving to 1 from -1 in November as forecast. This follows yesterday’s mixed US economic readings, which helped cap the recent rise in Treasury yields. US Durable Goods Orders dropped 2.0% month-on-month (m/m) in November, dramatically undershooting expectations of a 1.5% increase. 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. 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%. US economic data will remain in the spotlight this week with Thursdays releases of mortgage application totals, jobless claims data, and a consumer confidence gauge.
Positive Trade News Supports Sentiment
Although trade developments are more of a backburner issue for investors now that a US-China Phase One agreement is ostensibly complete, President Trump’s upbeat assessment of the deal and China’s unilateral reduction of certain tariffs are keeping market spirits high into the holidays. President Trump today said that the Phase One deal is “done” and noted that a signing ceremony is being planned. This follows reports over the weekend indicating 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.
Additional Themes
Oil Prices Resume Uptrend – Yesterday’s 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 only weighed on prices briefly yesterday. Today, crude prices are back around multi-month highs as industry estimates suggest a drawdown in US oil stockpiles this week. Hopes of a global economic rebound and expectations for slower gains in US shale oil production next year have helped buoy oil prices in recent weeks.
Mixed Signals from US Funding Markets – Yesterday’s liquidity offering (or “repo operation”) by the Federal Reserve was undersubscribed, suggesting that efforts to combat tightness in funding markets are meeting their goals. Analysts note, however, that some short-term funding rates still remain elevated and express lingering concerns over the potential for a year-end bout of liquidity disruption.