Last week saw several important developments that reinforce our positive outlook for the economy and markets.
Most importantly, the announcement of a U.S.-China phase-one trade deal points to a truce likely to be maintained through the U.S. presidential election. While details of the agreement are still being worked out, the suspension of U.S. tariff hikes scheduled for December 15 (with the September increase lowered by half) prevents an escalation of the conflict and significantly reduces risk.
|MSCI Emerging Markets||3.6||15.5||13.6|
|10-year U.S. Treasury||1.82||2.72||2.41|
|30-year U.S. Treasury||2.25||3.02||2.74|
Source: Janney ISG, Bloomberg. Data as of 12/13/19.
It is also encouraging that Congressional Democrats and the White House announced a deal to approve USMCA (an update of the North American Free Trade Agreement) this week. Trade uncertainty has been weighing on business sentiment and these agreements
should lead to improved business optimism and consequently improved spending and hiring plans.
Elsewhere, a decisive election victory by United Kingdom Prime Minister Boris Johnson should significantly reduce UK and European economic uncertainty that has existed since the UK voted to leave the European Union back in June 2016. Withdrawal legislation will likely be passed in the coming weeks that allows for a stable Brexit transition to begin at the end of January. Johnson has also promised fiscal stimulus that will likely boost UK economic growth next year.
Meanwhile, the Fed and ECB signaled last week that polices will remain accommodative for an extended time. Reduced trade and Brexit uncertainty, coupled with continued easy central bank monetary policy, should support economic growth and risk asset prices as we move into 2020.
U.S. Economic Reports Consistent with Further Economic Growth
The NFIB Small Business Optimism Index jumped in November, matching its highest level in six months. It was the biggest increase since May 2018. While optimism is below its cycle high reached in August 2018, the resurgence during the past couple of months
bodes well for economic activity in early 2020. The Duke CFO Business Outlook Survey showed optimism about the U.S. economy rose in the fourth quarter to its highest level in more than a year. Expectations improved for earnings, capital expenditures,
employment, and wage growth during the coming year.
The CEO Economic Outlook Index from the Business Roundtable fell to its lowest level in three years. CEO confidence is being hurt by trade policy uncertainty and the global growth slowdown. However, the survey was taken well ahead of the Congressional approval of USMCA and Friday’s announcement of the phase-one U.S.-China trade deal. Both should have a positive impact on business confidence.
While retail sales rose a less-than-expected 0.2%, part of the disappointing performance was likely due to seasonality. The late Thanksgiving holiday this year left six fewer days in the holiday shopping season than last year. On a year-over-year (y/y) trend basis, retail sales were up 3.5%, which is better than the pace of early this year, but worse than the average in 2018.
OECD Composite Leading Indicators Point To Stable Global Economic Conditions
Composite leading indicators (CLIs), designed to anticipate turning points in economic activity six to nine months ahead, continue to point to stable growth in the OECD area as a whole but with growth remaining below trend in all major OECD countries
and most large emerging economies.
Stable growth is anticipated in the euro area as a whole, including France and Italy, as well as in Japan and Canada. Signs of stabilizing growth are now emerging in Germany and the United Kingdom. Among major emerging economies, stable growth remains the assessment for Brazil, Russia and China. On the other hand, the CLI for India continues to point to easing growth.
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