Positive developments finally arrived in the ongoing trade war between the United States and China. Last Friday, the United States announced phase one of a trade deal with China. The president indicated that he would forgo the imposition of tariffs scheduled for December 15 and reduce existing tariffs on about $120 billion of Chinese imports. According to the president’s social media communications, China has agreed to make large purchases of targeted farm, energy, and manufactured goods. A representative of the Chinese government said the purchases would total about $200 billion over two years. Meanwhile, United Kingdom Prime Minister Boris Johnson’s Conservative Party enjoyed a robust victory in last week’s elections, securing a strong majority in Parliament. This development should give Johnson the votes needed to secure a Brexit deal and foster a new relationship with the European Union. Finally, the Federal Reserve maintained interest rates, noting strong consumer spending and steady economic growth.
All of this helped push stocks marginally higher for the week. All benchmark indexes posted gains, led by the Global Dow, most likely on the probability of a Brexit deal. The Nasdaq advanced close to 1.0%, followed by the S&P 500, the Dow, and the Russell 2000.
LAST WEEK’S ECONOMIC HEADLINES
- As expected, the Federal Open Market Committee maintained interest rates at their current 1.50%-1.75% range. For the first time in several months, the Committee’s vote was unanimous. In support of its decision to maintain rates, the Committee noted that the labor market remained strong and that economic activity has been rising at a moderate rate. In addition, while household spending has been rising at a strong pace, business fixed investment and exports remain weak. On a 12-month basis, overall inflation and inflation for items other than food and energy are running below 2%. Based on quarterly projections, the Committee sees the funds target rate ending 2020 at 1.625%, down from the previous projection of 1.875%.
- The November deficit for the federal government increased to $208.8 billion, $74.0 billion over October’s deficit. Compared to last October and November, the deficit for the first two months of fiscal year 2020 is larger by about $38.0 billion.
- Inflationary pressures may finally be gaining some momentum, likely influenced by the trade war between the United States and China. The Consumer Price Index for November advanced 0.3% after rising 0.4% in October. Over the last 12 months, the CPI is up 2.1%. Energy prices jumped 0.8% (gasoline increased 1.1%) last month, while food prices rose 0.1%. Consumer prices less food and energy advanced 0.2% in November, the same increase as in October.
- Prices at the producer level showed no change in November, but they advanced 0.4% in October and are up 1.1% for the 12 months ended in November.
- Retail sales increased slightly last month and are up 3.3% over November 2018. Non-store (online) sales increased 0.8% in November and are up 11.5% from November 2018.
- Import prices increased 0.2% in November following a 0.5% drop in October. The increase in import prices was driven by a 2.6% jump in import fuel prices — the largest monthly increase since prices rose 3.6% in May. Export prices also rose 0.2% last month after declining 0.1% in October.
EYE ON THE WEEK AHEAD
Aside from the impeachment proceedings, there’s plenty of market-moving economic information available this week, including the final report for the third-quarter gross domestic product. Residential reports out this week include November’s figures for housing starts and existing home sales, which increased almost 2.0% in October. Also of note is the November report from the Federal Reserve on industrial production, which fell 0.8% in October.