Treasury yields opened higher this morning, with the 10-year trading around 2.669%. Conversely, equity futures opened lower, with S&P futures down nearly 0.3% as the World Trade Organization released a quarterly trade indicator earlier this morning, which reflected a reading of 96.3, the lowest read since March 2010.
U.S. stocks and Treasury yields rallied last week largely having a RISK-ON mentality as trade talks between the U.S. and China progressed. Positive sentiments from both sides gave the markets hope that an agreement will come to fruition relatively soon. Sino-U.S. trade talks will resume in Washington D.C. today. President Trump also reiterated a possible extension of the March 1 deadline, which is when the U.S. is meant to impose further tariffs on Chinese goods if the two sides cannot come to an agreement.
All three major U.S. equity indices closed last week in the green, with both the Dow Jones and Nasdaq posting their eighth consecutive weekly gains closing the week around 28,833 and 7,472 respectively. Similarly, Treasury yields also closed the week higher, as the 10-year Treasury hovered around 2.664% around Friday’s close. Oil prices also swung higher on the back of a possible trade deal triggering demand and tighter supply. U.S. crude hit its highest level this year at $55.80/barrel.
The U.S. government averted another shutdown coupled with a better-than-expected sentiment from the Michigan University survey (see more below) also fueled the cheerier disposition on the Street late in the week.
This week, all eyes on the Chinese and U.S. officials regarding a trade agreement. Further, a slew of key data releases both domestically and abroad will keep the markets on its toes. Domestically, key data scheduled for the week include FOMC minutes, Markit Services/Manufacturing, Existing Home Sales and Durable Goods Data.
U.S. markets were closed on Monday due to the President’s day holiday.
I. U.S. Economic Data/Markets
- U.S. Retail Sales dropped 1.2% in December, the biggest monthly decline since September 2009. Analysts had expected an increase of 0.2%.
- The weaker-than-expected number may prompt Q4 2018 GDP forecasts to be lowered as consumption comprises about two-thirds of U.S. GDP.
- U.S. industrial production dropped 0.6% in January, the first dip in eight months, versus estimates of a flat reading.
- All categories except for mining and utilities dropped in the month.
- Slower global growth, trade tensions, and a stronger USD served as headwinds to the manufacturing sector.
- University of Michigan sentiment surprised to the upside rising to 95.5 from 91.2 last month.
- The end of the partial government shutdown and the Fed’s pause regarding rate hikes likely attributed to the more positive outlook.
- Federal Reserve Chairman Jerome Powell did not think that the risk of an economic recession was elevated in the current environment when questioned after a speech delivered last week.
- He also noted that economic expansion seen over the past few years has not been evenly shared across the nation. While data at the national level reflect a strong economy, rural areas, in particular, have continued to struggle.
- FOMC Official Mester noted limited inflation risk from rising wages in a speech last week.
- Mester has generally been more hawkish than other members of the FOMC. Her sentiments support the argument for fewer rate hikes.
- She said the Fed would likely finalize its plans regarding shrinking its balance sheet in the coming FOMC meetings.
- FOMC Official George suggested that the current economic environment may be favorable for more experimental policies for the Fed.
- Believed the Fed can pause rate hikes and learn from the impact of rate hikes to help inform future policy decisions.
- George has also typically been more hawkish but was supportive of the Fed taking a pause regarding rate hikes. She too noted that inflationary pressure was not strong.
II. Other
- Chinese/U.S. Trade Talks – officials from both sides held discussions last week, which are expected to continue into this week. Officials claimed to have had made some progress, with commitments to be reflected in a Memoranda of Understanding between both countries.
- The memorandum will likely focus on China’s move to purchase more U.S. goods, improving intellectual property rights and China further opening its markets to financial services and manufacturing.
- We believe while painful for China in the short-term, any improvements in protecting intellectual property rights will have a long-term benefit for China.
- Chinese CPI and PPI data for January came in weaker-than-expected.
- CPI increased 1.7% y-o-y in January, versus expectations of 1.9%, in part due to falling food prices.
- PPI increased 0.1% y-o-y in January, versus expectations of 0.2%.
- Chinese trade data comes in better-than-expected with January exports rising 9.1% y-o-y, up from December’s drop at 4.4% and beating estimates of a 3.2% drop.
- Imports declined 1.5% beating forecasts of a 10% drop and December’s 7.6% decline.
- Despite the relatively upbeat data, the Chinese New Year holiday which kicked off earlier this month may skew results as companies may place rush orders ahead of the holidays.
- U.K. Parliament voted against (303 to 258) PM May’s proposed amended Brexit plan.
- The deal included an amendment on renegotiating the Irish backstop.
- Parliament also declined to extend the March 29 deadline in the event a no Brexit deal persists.
- Going forward, May will need to secure changes to the Irish backstop, to avoid a hard border between Northern Ireland and the Republic of Ireland.
- If a deal is not approved by February 26th, May will likely provide an update on her progress and lawmakers will have an opportunity on Feb. 27 to debate and vote on the way forward.
- U.K. Retail Sales bounced in January, rising 1% in January after declining 0.7% in December.
- The 4.2% y-o-y rise in January was the biggest annual rise since December 2016.
- Japan’s economy grew 1.4% in the final quarter of 2018, after contracting 2.6% in the previous quarter.
- Household spending and Corporate CapEx largely attributed to the data.
Key data/events this week:
- GBP Unemployment data (Tuesday)
- German/EU ZEW Survey
- NZD PPI
- JPY Trade Data
- AUD Wage Price Index (Wednesday)
- EUR PPI
- Swiss Industrial Production
- FOMC Minutes
- Japanese Foreign Stock/Bond investment
- AUD Unemployment data (Thursday)
- JPY All Industry Index
- German CPI
- German/EU/U.S. Markit Composite/Services/Manufacturing
- U.S. Existing Home Sales
- U.S. Durable Goods
- U.S. Philadelphia Manufacturing
- JPY CPI
- German GDP (Friday)
- German IFO data
- EUR CPI
- CAD Retail Sales
