Phase-one China trade deal and Brexit dominating markets

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Published Date 12/13/2019

Some improvement this morning in the MBS market after the price declines yesterday and increases in yields. News on the phase one trade deal sent interest rates up as well as the stock indexes. The 10 yr note, after the US market closed at 5:00 pm ET yesterday, rose to 1.94% from 1.79% on Thursday. The US stock market was strong yesterday with another new all-time high for the S&P index.

President Trump signed off on a phase-one trade deal with China, averting the Dec 15th introduction of a new wave of US tariffs on about $160B of consumer goods. President Trump was adamant that China increase purchases of US agriculture products. From what we hear, there were also discussions about reducing the tariffs that are currently in place. The deal has yet to be official, but CNBC reports are saying China still has concerns about targets for agricultural purchases.

Brexit, another issue that has been hanging over markets, also appears to be moving forward with the election victory of Boris Johnson. The UK will leave the EU on Jan 31st, 2020. The snap election gave Johnson a huge win, and it wasn't close. The pound rose by the most in almost three years as the scale of the Tory victory became clear. There is still resistance in Scotland and Northern Ireland, but the exit is seen as likely now.

At 8:30 am ET November retail sales were weaker than forecasts; +0.2% compared with estimates of +0.5%, less auto sales expectations were +0.4%, as released +0.1%, less autos and gas 0.0% on estimates of +0.4%. Clothing stores and restaurants posted declines, signaling the economy's main engine may cool in the fourth quarter by more than previously thought. Sales in the "control group" subset increased a below-forecast 0.1% following a 0.3% gain (control group excludes food services, car dealers, building-materials stores, and gasoline stations). Soft sales may portend a weaker holiday shopping season, but consumers still have enough confidence to support the expansion, and an easing of U.S.-China trade tensions should help the economy in 2020. BofA Global Research reporting retailers had the highest sales gains for the period up to Black Friday since 2013.

Nov import and export prices reported this morning; import prices and export prices both increased by 0.2% m/m; yr/yr both -1.3%.

At 9:30 am ET, the Chinese press conference was about to begin, but at the last minute, it was delayed by 30 minutes. While a deal is likely, it isn't going to be as friendly as markets thought yesterday. There are several reports that Chinese officials requested to keep the text of the deal out of the public eye. China's Foreign Minister, Wang Yi, made some comments that weren't exactly celebratory. The foreign minister said that the US defamed China on several occasions and that the US severely damaged "hard-won" mutual trust.

At 10:00 October business inventories +0.2% as expected.

Source: TBWS

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