RISK-ON – U.S. equity futures and USD interest rates are opening higher this morning for what will be a busy week dominated by the signing of the U.S.-China phase-one trade deal and the start of earnings season. Futures on the S&P 500 Index rose 0.35% to 3,276.25 and the on-the-run 10-year U.S. Treasury is trading 2.1bps higher to 1.843%.
Last week, marking a record 111th straight month of U.S. employment growth, the U.S. added 145,000 jobs in December 2019 with the clothing stores and oil and gas sectors leading the hiring. In contrast, the mining and logging sector was a loss leader. The U-3 unemployment rate held steady at 3.5% and average wage gains rose to an annualized 2.9%, according to the U.S. Bureau of Labor Statistics.
While payrolls may be consistent with forecasts for gradual moderation, the wage numbers suggest that the labor market isn’t as tight as the unemployment rate indicates. Fed Funds Futures show that traders are aligned with the Federal Reserve in showing steady and unchanged funding rates throughout 2020.
After the threat of a full out war between the U.S. and Iran last weekend, tensions simmered down as Iran, in response to the U.S. killing of Iran’s general, allegedly intentionally missed crucial U.S. military bases and personnel across the border in Iraq. The current focus has shifted instead to the accidental surface-to-air missile launched by Iran at a civilian Boeing 737 killing all onboard. The admission over the weekend provided some relief to Boeing shareholders, the wider airline industry, and travelers overall as fears of a similar fallout from the 737 MAX scandal were allayed. Both WTI and Brent crude oil reversed to the mean of $59.125/bbl and $65.04/bbl, respectively.
The U.S-China Trade Deal
A delegation from China, led by Vice Premier Liu He, is scheduled to travel to the U.S. today to sign phase one of the U.S.-China trade deal on Wednesday. As of last Friday, the translation of an 86-page agreement was not yet completed. It is widely expected that under the agreement, China would boost imports from the U.S. and protect intellectual property rights. In exchange, the U.S. will cancel new tariffs on $156 billion worth of Chinese goods and halve existing tariffs on $120 billion of Chinese goods. Phase-two will begin shortly thereafter.
Brexit
The UK is finally all but ready to leave the European Union (EU) at the end of January after Prime Minister Boris Johnson’s decisive election victory last month. After the House of Commons voted in favor of Johnson’s Brexit deal, the House of Lords are expected to vote and support Johnson’s EU withdrawal agreement this week. While Brexit risks remain, the key risk drivers this year will less likely be attributed to the UK Parliament and instead shift to the direct negotiations between the UK and EU or lack thereof.
Key events coming up this week:
- Fed speak from Eric Rosengren discusses the economic outlook on Monday.
- Financial institutions including JPMorgan Chase, Citigroup, and Wells Fargo will kick off the earnings season on Tuesday.
- The U.S. releases CPI inflation data for December on Tuesday.
- The Fed’s beige book, Summary of Commentary on Current Economic Conditions, is released on Wednesday.
- China’s GDP comes out on Friday.
