Stocks reached new record highs again last week with two major steps taken toward cooling trade war tensions and reducing economic uncertainty.

The phase-one U.S.-China trade deal was signed and the Senate passed the USMCA (NAFTA 2.0).

IndexWTDYTD1-YR
Dow Jones1.82.923.4
S&P 5002.03.128.8
MSCI EAFE0.91.119.6
MSCI Emerging Markets1.22.916.8
YieldsCurrent20182017
10-year U.S. Treasury1.821.922.68
30-year U.S. Treasury2.282.393.01

Source: Janney ISG, Bloomberg. Data as of 1/1719.

The trade deal with China includes an increase in China’s imports from the U.S. by $200 billion within two years, along with enhanced protection on intellectual property and technology transfers, financial sector liberalization, and a currency clause. The tariff rate on $120 billion of imports from China will be cut in half to 7.5%. However, significant work remains before a phase-two deal can be reached and we do not anticipate one before the presidential election.

On USMCA, the deal now needs to be signed by President Trump and passed by the Canadian Parliament. This should occur within the coming few months, with full implementation by later this year. These deals should support global economic growth in 2020.

U.S. Economic Developments

December retail sales matched expectations, up 4.1% on a year-over-year (y/y) basis and the most since November 2018. Consistent consumer spending is underpinned by tight labor markets and continued wage gains. Indeed, initial jobless claims fell another 10,000 last week to a mere 204,000, below the consensus of 216,000, and near its lowest level since 1969. This boosted consumer confidence, with the Bloomberg Consumer Comfort Index reaching its highest reading since September 2000. We anticipate underlying consumer strength will continue to drive economic growth this year.

While the NFIB Small Business Optimism Index slipped in December, it remains elevated and is holding on to most of the spike in the immediate aftermath of the 2016 presidential election—consistent with further economic growth.

The NAHB Housing Market Index remained elevated with the readings of the last two months representing the highest builder confidence since July 1999. This elevated builder confidence is translating into higher housing starts, which jumped 16.9% in December, the most since October 2016, to a 1.608 million unit annual rate, the highest level in 13 years. We continue to expect housing to make a positive contribution to economic growth in 2020, driven by low mortgage rates, low unemployment, and more household formations (pent-up demand).

The OECD U.S. Composite Leading Indicator (CLI) rose in November, its second straight gain after a grueling 17-month stretch of consecutive declines—indicating an improvement in the economic outlook.

The Consumer Price Index (CPI) increased a below consensus 0.2% (2.3% y/y) in December, while core CPI, which excludes food and energy, edged up 0.1% (2.3% y/y), also below the consensus of 0.2%. The Producer Price Index (PPI) also came in below expectations and is up only 1.3% y/y. Both the CPI and PPI reports continue to indicate that inflation pressures remain subdued, implying no change in Fed policy in the near-term.

OECD Leading Indicators Show Growth Stabilizing in Most Advanced Economies

Composite leading indicators (CLIs), designed to anticipate turning points in economic activity relative to trend six to nine months ahead, point to growth stabilizing, albeit below long-term trends, in most advanced economies. The CLIs continue to point to stable growth in Japan, Canada and the euro area as a whole, including France and Italy. In the United States, Germany and the United Kingdom the signs of stabilization, flagged in last month’s assessment, have been confirmed. Among major emerging economies, stable growth remains the assessment for Russia and China. Growth is expected to gain momentum in Brazil but ease in India.

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