To no surprise, the Fed decided to leave interest rates unchanged. The committee continues to recognize sustained economic expansion and strong labor markets, but lingering concerns are business investment, exports, and subpar inflation. It even added that longer-term inflation expectations remain low, a sign that no rate hike is expected through 2020 (the typical action for combating inflation). Market expectations have been largely aligned with this sentiment for months now, assigning no chance of a hike (but a wavering chance of an additional cut) by the end of 2020.
Britain held its general “snap” election on Thursday December 12, a failsafe triggered by another delay with a Brexit (leave EU) resolution before the prior October 31, 2019 deadline. If there was any confusion as to where British voters still stood on the Brexit issue, that confusion is now removed with the Conservative (pro-Brexit) party securing a landslide victory over anti-Brexit parties. Now with a sizeable majority in the House of Commons, Prime Minister Boris Johnson likely will have a much easier time passing a Brexit bill before the new January 31, 2020 deadline. The odds of Brexit being revoked dropped overnight Thursday from 20% down to a mere 1%. The day after, both the FTSE 100 (UK large cap stock index) and the British Pound enjoyed huge rallies.,
At the World Trade Organization (WTO), the U.S. continued its policy of refusing to fill appellate judge vacancies, citing an inappropriate compensation structure of judges and failure to issue rulings within the 60-90 days as promised, which is ineffective in countering unfair trading practices, especially with China. The move shuts down the WTO appeals process, as the one remaining judge is insufficient for the body to issue rulings. International trade existed before the WTO and disputes can and have been resolved outside of the WTO framework, so the situation is not of hopelessness but rather one of uncertainty. The WTO spat and Brexit are reflective of the times, with nationalism gaining traction over supranationalism. This is causing major shifts in policy, and major shifts create uncertainty for market participants.
A result of nationalism (in this case “America First”) has been the continuing trade war with China. There appears to be progress as both sides “have agreed on the wording” of a Phase One deal, according to Chinese state-sponsored media. Both sides halted the proposed tariffs for December 15. In addition, the U.S. is cutting tariffs in half for $120 billion of Chinese goods (while 25% tariffs remain on $250 billion). For the other side, China will increase purchases from the US to $200 billion over 2 years; this number was $130 billion in 2017 before the trade war. Phase One will include some protections on patents, trademarks, copyrights, and some pledges on reducing forced technology transfers for US companies in China. There are also pledges to prevent currency devaluation and means of enforcing the provisions of the deal. It’s a major positive breakthrough for market participants, if both sides follow through on the apparent agreement. However, many of the issues addressed were prior pledges made by China that it failed to enforce.
International Developed equities rallied on election results, and Emerging Market equities rallied on the Phase One trade deal. Core CPI held steady at 2.3% year-over-year while PPI was weaker-than-expected, a sign of slowing inflation. Jobless claims last week jumped up higher than expected, a shift from prior weeks. Retail sales showed a continued slowing, although still positive.
This week will feature releases on PMI, housing, industrial production, personal income and outlays, and consumer sentiment.
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