As we all head towards holiday gatherings with friends and family, those of us in the financial world are likely to be faced with inevitable questions on the markets. With that in mind, here are some key facts to keep in your back pocket.
1) How is the job market?
The job market remains strong. At the peak of the Great Recession, unemployment was ~10%. Now unemployment has dropped to ~3.5% with initial jobless claims around historic lows. Moreover, there are 1.2 job openings for every unemployed person.
2) Is the trade war still a concern?
The US-China trade was the key story of 2019, with the trade war kicking off in March 2018 when the US announced steel and aluminum tariffs. Currently, both countries are moving towards a Phase 1 deal that is likely to be followed by a cease fire until after the Presidential election. Given this, the US-China relationship remains strained and is unlikely to dissipate anytime soon. In short, don't expect this story to go away any time soon.
3) What impact does the 2020 Presidential election have on the economy?
Broadly, this will have to do with who is the ultimate Democratic nominee, what his or her policies are and the likelihood of these policies passing. In terms of timing, 40% of delegates will have been decided by Super Tuesday on March 3, which should narrow the field. However, given the crowded Democratic field and now party rules, it is possible there will be a contested convention. Moreover, keep an eye on Congressional races as they inform the likelihood of policy proposals passing. In short, this one is a real wildcard.
4) Why does the Fed want inflation?
It seems counterintuitive to want prices to increase. But increasing prices keeps the economy from falling into a deflationary spiral. If prices were falling, consumers would be incentivized to save and delay purchases. This would result in businesses cutting back on investments and hiring as revenues fall. With less jobs, consumer spending drops further and the negative loop continues.
5) Will there be a recession soon?
The current expansion is a long one, but it's important to remember that expansions don't die of old age but rather policy mistakes or excess in the market. Because of the slow and bumpy pace of expansion, there are not really many signs of excess in the market. Additionally, with the Fed delivering insurance cuts in 2019, monetary policy is accommodative. Certainly there are risk and economic indicators, such as initial jobless claims, that merit monitoring, but a recession doesn't appear to be near.
Hopefully we covered all the bases, but should all else fail, you can always confuse the issue by talking about the NFL pass interference challenge system. That's the best way to ensure that no one has a clue as to what's going on.
While the linkage with the upward surging GBP has been strong at times, the euro has also been pressured by weak EZ economic data and a persistently overachieving DXY. EUR/GBP reflects this bipolar relationship and continues to grind lower since October making multi-year lows before finally correcting higher. The euro has remained confined between $1.1000 to 1.1200 since November despite numerous bullish and bearish cycles. With markets thinning and volumes declining, expect further consolidation.
The GBP had a spectacular resurgence since October 1 appreciating nearly 6% against the U.S. dollar and has appreciated against numerous other major currencies as optimism spread that a Tory majority in Parliament could finally deliver a positive conclusion to Brexit. Going forward, the heavy lifting will commence regarding a successful conclusion to the Withdrawal Agreement and finding common ground with the EU regarding trade which has resulted in profit-taking and the GBP correcting lower. Trade negotiations will be difficult to conclude within a one year time frame, but both sides need and want a trade agreement that works for all. GBP should be consolidative in the short term but better bid overall.
The JPY has been on a weakening trend since September 1 coinciding with the resumption of U.S. – China trade talks to a successful conclusion to Phase 1 in early December. But over the past month, the JPY is near unchanged as U.S. interest rates have stabilized and come off their highest levels. Continue to expect the JPY to respond positively or negatively to changes in U.S. interest rates. Expect further consolidation this week.
Despite extreme volatility with the CAD over the past two months, the CAD remains the top performing major currency this year up by nearly 3.60%. Markets have been whipsawed by both positive and weak Canadian economic data and nuanced changes with the Bank of Canada messaging combined with the overlay of U.S. dollar impacts. Expect more sideways consolidation in the near term with a slight bias toward a stronger CAD.
Upon the successful conclusion to Phase 1 of the U.S. – China trade talks, the CNY remains largely range bound hovering near the 7.00/$. While a de-escalation of tensions has been uber supportive for equities and other assets and commodities, markets await further details and execution of the details of this trade agreement. Phase 2 awaits down the road. Continue to expect further sideways trading in the near term.
The Aussie mirrors much of the recent developments of other key major and commodity-linked currencies piggybacking the positive or negative developments regarding U.S. – China trade prospects. While the Aussie has experienced multiple bullish and bearish trends since August, it has returned back again to the same levels seen in early August. The RBA kept rates unchanged at its last meeting of the year following three rate cuts in June, July, and October. Markets remain slightly biased toward another rate cut in February with a 36% probability. Expect a steady and range bound AUD this week.
MAJOR CENTRAL BANK ACTIVITY THIS WEEK
There are no central bank meetings over the next two weeks.
KEY MARKET MOVING ECONOMIC RELEASES
Durable Goods Orders
Expectations for a gain of 1.5% following a 0.5% gain
New Home Sales
Expectations for slight decline from 733k to 730k
Canada Oct. GDP
Expectations for a small gain of 0.1%; YoY drops to 1.4%
There are no major economic releases this week.
Asia/Japan, and New Zealand
Tokyo CPI YoY
Expectations for a gain of 0.6%
Japanese Jobs Report
Expectations for the UR to remain at 2.4%
Japanese Ind. Prod.
Expectations for a decline of 1.1% after a -4.5% print
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