Cyber Monday Arrives While a Trade Deal Awaits

Dec 02, 2019

On Trade Deals and Jobs

With Thanksgiving behind us the holiday-spending sprint to Christmas is fully on. Given the lateness of Thanksgiving this year it could play havoc with the seasonal factors involved in determining retail sales so an accurate assessment might not come until January. The real driver of yields in the near-term will unfortunately continue to be the outlook for a US/China trade deal. The calculus is really as easy as: if a trade deal is consummated expect yields to push higher near recent range extremes. If a deal is not concluded and the December 15 tariffs go into effect expect yields to dip lower through the recent range. For the benchmark 10yr Treasury think a range of 1.70% to 1.97% that has held for the last month. Away from the trade angle, the jobs report on Friday and the pair of ISM reports today and Wednesday will give us a quick read on November. Expectations for the employment report are upbeat with 188k new jobs forecast (including 50k returning GM strikers), while the ISM reports should be similar to recent trends: a continued struggle in manufacturing while the services sector remains strong.

Derivative Market Rates

Brokered Deposit Rates

Treasuries
Treasury Curve	Today	Week Change
3 Month	1.58%	+0.01%
6 Month	1.61%	+0.03%
1 Year	1.60%	+0.04%
2 Year	1.63%	-0.01%
3 Year	1.64%	+0.01%
5 Year	1.67%	+0.03%
10 Year	1.84%	+0.06%
30 Year	2.28%	+0.06%

Short-Term Rates
Fed Funds	1.75%
Prime Rate	4.75%
3 Mo LIBOR	1.91%
6 Mo LIBOR	1.90%
12 Mo LIBOR	1.95%
Swap Rates
3 Year	1.619%
5 Year	1.634%
10 Year	1.760%

Economic Calendar
Date	Statistic	For	Briefing Forecast	Market Expects	Prior
Dec 2	ISM Manufacturing Index	Nov	49.5	49.2	48.3
Dec 2	Construction Spending	Oct	0.4%	0.4%	0.5%
Dec 4	ADP Employment Change	Nov	155k	140k	125k
Dec 4	ISM Non-Manufacturing Index	Nov	54.5	54.5	54.7
Dec 5	Trade Balance	Oct	-$51.5b	-$48.6b	-$52.5b
Dec 6	Change in Nonfarm Payrolls	Nov	190k	188k	128k
Dec 6	Unemployment Rate	Nov	3.6%	3.6%	3.6%
Dec 6	Avg. Hourly Earnings (YoY)	Nov	3.1%	3.0%	3.0%
Dec 6	U. of Mich Consumer Sentiment	Dec P	96.5	97.0	96.8

Top 5 Events for the Week

December 2-6, 2019

1. Trade & Impeachment Developments – All Week
2. November Employment Report – Friday
3. November ISM Reports – Mon./Wed.
4. October Trade Balance – Thursday
5. December U. of Mich. Sentiment – Friday

1. Trade and Impeachment Developments – All Week

With Thanksgiving behind us the holiday-spending sprint to Christmas is fully on. Given the lateness of Thanksgiving this year it could play havoc with the seasonal factors involved in determining retail sales so the final assessment might not come until January. Be that as it may, the real driver of yields in the near-term will unfortunately continue to be the outlook for a US/China trade deal. The calculus is really as easy as: if a trade deal is consummated expect yields to push higher near recent range extremes. If a deal is not concluded and the December 15 tariffs go into effect expect yields to push lower through the recent range. For the benchmark 10yr Treasury think a range of 1.70% to 1.97% that has held for the last month. To push yields above the high, a trade deal and better-than-expected holiday sales will be necessary, but again, those numbers won’t likely be available until we’re into January 2020.

2. November Employment Report – Friday

If the November jobs report on Friday comes as expected it could add pressure to Treasury yields. For the month, forecasts are calling for 188k in job gains—the largest since August’s 219k— as 50k returning GM strikers skew the number higher. For example, manufacturing jobs are expected to increase 40k versus a –36k decline in October that reflected the aforementioned striking workers. If one adjusts for the GM workers the more accurate job gain will still be a respectable 140k. The unemployment rate is expected to remain at 3.6% for a second straight month. Meanwhile, wage gains are expected to improve to 0.3% from October’s 0.2%. YoY wage gains are expected at 3.0% same as the prior month. In summary, if the report comes as expected it will reflect a labor market that continues to exude strength and that will keep the Fed firmly on the sideline as we move into 2020.

3. November ISM Reports – Monday/Wednesday

Along with this week’s jobs report the pair of ISM reports will give us another early tell on November activity with the manufacturing sector report due later this morning. The forecast is for a slight uptick to 49.2 versus 48.3 in October. The 50-level is the dividing line between an expanding and contracting sector so the expectation is to straddle the line for now. Despite the slight uptick expected, the index still pales in comparison to its 12-month average of 52.7 which speaks to the recent damage done by trade uncertainties and the global slowdown. The ISM Non-Manufacturing Index follows tomorrow. The services sector constitutes nearly 90% of the economy and it’s been stronger than the manufacturing arena, albeit softening some in recent months. The services index is expected to be nearly unchanged at 54.5 versus 54.7 in October. The index has averaged 56.3 over the past year so a moderate decrease is expected from the yearly average but still well above 50 indicating more health in the services sector compared to the weaker manufacturing sector.

ISM Manufacturing and Non-Manufacturing

4. October Trade Balance – Thursday

The monthly trade balance reports have been carrying a little more weight now that the latest trade talks hang in the balance. For November, the overall trade balance is expected to narrow to -$48.6 billion versus -$52.5 billion in October. The trade deficit has ranged from a twelve-month wide of -$60.8 billion last December to a narrow -$50.7 billion in February. The deficit was -$56.9 billion a year ago, so with all the trade-related headlines and tariffs, the deficit is expected to have narrowed by $8 billion over the last year.

5. Preliminary December U. of Michigan Consumer Sentiment – Friday

With consumer consumption two-thirds of the economy, readings on consumer confidence are an early tell on future spending. If confidence readings start to trend lower it’s a warning that the consumer may be close to pulling back. The preliminary December read from the University of Michigan on sentiment is expected to be 97.0 versus 96.8 in November’s final reading. The high print was 101.4 in March of 2018 when tax cut euphoria was running high. The average over the past year has been 95.9, so a near on-average reading is expected. Inflation estimates are expected at 2.5% for the 1-year period and 2.5% for the 5-10yr horizon.