Market participants holding long positions in equities, rates, or alternatives sectors such as real estate have reason to be optimistic in Q1 2020. Last Wednesday, a major global risk hurdle was cleared with the smooth signing of phase-one of the U.S.-China trade agreement. Further pushing the RISK-ON investor sentiment was Friday’s annual gross domestic product (GDP) 6.1% print in China, and a preliminary survey that showed U.S. consumer sentiment held strong and steady in January and new home construction in the U.S. accelerated to its highest level in 13 years. The S&P 500 index reached fresh peaks with a 0.4% gain and closed above 3,300 for the first time.
US-China Trade Deal
- The U.S. and China signed a historic trade agreement last Wednesday, marking temporary closure to the two-year trade war.
- Click here to read the text of the Trade Agreement.
- The U.S. removed China from the list of currency manipulators.
- We now move on to phase two of the trade negotiations, though we do not expect the U.S. to come in as aggressive during the election year as China can pull its agreement, hurting U.S. farmers, if the U.S. enacts more tariffs.
China Economics
- China, on Friday, reported a 6.1% annual gross domestic product (GDP) print in China, the world’s second-largest economy after the U.S., within the government’s target range of 6% to 6.5%.
- Fixed-asset investment rose 5.4% in the year.
- The upward momentum in November persisted in December’s 6.9% industrial output print.
- Manufacturing output surged to 7% from 6.3% driven by autos.
- Retail sales maintained an 8% growth rate, beating expectations.
Federal Reserve
- The Federal Open Market Committee (FOMC) welcomed in a new rotation of Fed officials who will gain a formal vote on monetary policy. Among the four new voters this year are:
- Minneapolis Fed President Neel Kashkari (Dove)
- Dallas Fed President Robert Kaplan (Neutral)
- Cleveland Fed President Loretta Mester (Hawk)
- Philadelphia Fed President Patrick Harker (Hawk)
- Leaving the voting committee is the Kansas City and Boston Fed Presidents (both Hawks) who both formally dissented against Powell’s rate cuts. Chicago Fed President Charles Evans will also leave the voting committee.
- Boston Fed leader, Eric Rosengren, warned last week that the biggest risk facing the U.S. economy in 2020 are higher inflation and financial-stability problems driven by low-interest rates.
Fed’s Beige Book
- The Fed’s beige book, otherwise known as the Summary of Commentary on Current Economic Conditions, revealed that the U.S. economy is entering 2020 on solid footing, having kept up its modest expansion in the final six weeks of 2019. “Expectations in the near-term outlook remained modestly favorable across the nation” with “tight labor markets, slow price increases and a solid holiday season particularly among online shoppers offsetting weakness in manufacturing.”
- Businesses are confident in their prospects.
- Banks reported loan volumes that were steady or growing moderately.
- Housing construction continues to expand.
- New car sales continued its moderate growth.
- Agriculture and energy firms reported little change over the period.
Corporate Earnings
The first week of the Q4 2019 U.S. corporate earnings season saw stronger-than-expected profits and revenue from 9% of the companies in the S&P 500. Of the companies in the S&P 500 that have reported Q4 2019 results, 72% have reported actual EPS above the mean EPS estimate.
- While the IT and Energy sector led the highest percentage of companies reporting earnings above estimates.
- Leading the Financials sector, Citigroup, JPMorgan Chase, Bank of America, and Morgan Stanley all had positive EPS surprises.
- U.S. Bancorp, Wells Fargo, and Goldman Sachs had negative EPS surprises, with the latter two banks taking big legal charges that dragged down profits.
- 63% of S&P 500 companies have reported a positive revenue surprise.
While global growth is forecasted to shrink this year, according to the World Bank, growth expectations in the U.S. are expected to increase.
Key events coming up this week:
- Equity and fixed income markets are closed on Monday in observance of the Martin Luther King U.S. holiday.
- On Tuesday, global leaders will converge at Davos, Switzerland for the annual World Economic Forum (marking the 50th anniversary) to discuss trade, growth, tech regulation, and climate change.
- No Fed speeches are scheduled as blackout communications are in effect (before its Jan. 28-29 meeting).
- U.S. Treasury auctions schedule:
- Jan. 21: $42 billion of 13-week bills; $36 billion of 26-week bills.
- Jan. 23: 4-, 8-week bills; 10-year TIPS reopening.
