Chevron left arrow. Market Commentary

Strong Housing, Consumer Data Overshadows Trade For the week of December 2, 2019

Key Market Data

11/22/2019 11/29/2019 One Week Change YTD One Year
S&P 500 Index 3,110.29 3,140.98 +0.99% +27.63% +17.08%
MSCI EAFE Index 1,964.84 1,974.47 +0.49% +18.88% +12.51%
Barclays Capital U.S. Aggregate Bond Index 2,223.16 2,226.55 +0.15% +8.79% +10.85%
10-year Treasury Note Rate 1.771% 1.777% -0.6 basis points -90.8 basis points -125.5 basis points

Economic data over the past week largely overshadowed the typical trade-dominated narrative. The housing market, for example, showed several signs that it’s firming as the Federal Reserve’s rate cuts trickle through the economy. Consumers, as they have throughout 2019, continued to spend — aided by low inflation and modest wage growth. And although consumer confidence has declined the past few months, it remains historically high and that should bode well for the holidays. On the trade front: President Donald Trump says the U.S. and China are in the “final throes” of a phase-one deal, and lawmakers could vote on the USMCA trade deal as soon as this week.

We’re also particularly interested in the unemployment figures coming Thursday and Friday. We’ll be digging beyond the headline figures to see if the data has a deeper story to tell. We’ll also be looking for more signs that clouds are clearing in the manufacturing sector.

WALL STREET WRAP

Housing market firms following rate cuts: New home sales decreased 0.7 percent on a monthly basis in October. However, the big story was the government’s upward revision to September’s read: from 701,000 to 738,000. That revised figure, combined with October’s total of 733,000, makes this the best two-month stretch for new home sales in more than 12 years. The housing market is among the sectors most sensitive to interest rates, and sales appear to be catching up with the Federal Reserve’s rate cut trifecta from July to October. Meanwhile, pending home sales (a measure of signed contracts) dropped 1.7 percent as demand for housing far outweighed the supply of homes for sale, further signaling strength in housing.

Consumer confidence down, but far from out: The Conference Board Consumer Confidence Index declined to 125.5 in November (it was 126.1 in October), the fourth consecutive month this metric has fallen. Consumer confidence fell amid concerns about business conditions and employment prospects, but confidence remains high, historically speaking, and should support spending during the holiday season. Case in point: as of Tuesday, Adobe Analytics forecast that holiday shoppers had spent $50.1 billion from Nov. 1 through Nov. 26, a 15 percent increase from 2018. And on Black Friday, according to Adobe, consumers spent $7.4 billion online, up 19 percent from last year.

Inflation flat, wages and spending up: Although household incomes were flat overall in October, the Commerce Department on Wednesday said wages and salaries grew at a seasonally adjusted rate of 0.4 percent compared to 0.1 percent in September (some of the increase factors in adjustments made for the General Motors strike). At the same time, inflation rose and at slower rate, 0.2 percent, month over month. Real wage growth and flat inflation should bode well for continued spending growth. In fact, third-quarter GDP was revised upward to 2.1 percent, driven by strength of the U.S. consumer.

Economy expanding “modestly”: The Federal Reserve sounded a more upbeat tone about the economy in its monthly Beige Book report, which is the central bank’s compilation of anecdotal observations from businesses throughout the country. More Fed districts reported expansion in manufacturing activity than the prior month, though most districts still reported no growth. It’s a bright spot in a notably weak sector throughout the year. While employment rose modestly, businesses are still finding it hard to fill positions as the shortage of skilled labor persists. Overall, firms expect prices and wages to rise going forward, but that doesn’t mean those costs will be passed onto consumers. “A food retailer said that while tariffs had increased costs, the company ‘cannot raise prices on a whim’ because of fierce competition,” according to an anecdote from the Cleveland Fed.

Your weekly trade update: For the first time in weeks, the trade war took a back seat to a flurry of relatively positive economic data. But on Tuesday, President Donald Trump said the U.S. and Beijing were in the “final throes” of securing a phase-one trade deal. Additionally, sources indicated a vote on the USMCA trade deal could come this week. Stocks notched another record on the news, rising for the fourth day in a row, before the Thanksgiving holiday.

THE WEEK AHEAD

Broad-based wage growth? On Thursday and Friday, we’ll get important unemployment figures from the government. The headline numbers often move markets, but we’ll be looking for deeper insights about the U.S. workforce. Particularly, we’ll be looking to see if wage growth is broad-based, which means growth for all workers from low- to high-income levels. We’ll also be watching for revisions to the prior month’s figures. Strong employment, and a tide lifting all boats, bodes well for continued consumer strength.

Clouds parting in manufacturing? As the Fed reported last week, there were some encouraging signs for the U.S. manufacturing sector. This week, we’ll see if the data about factory orders, construction and a key manufacturing index supports growing optimism in a sector that has struggled for growth through the trade war.

USMCA vote? Also, markets could get a lift this week if, as reported, lawmakers vote on a USMCA deal this week. If not this week, sources indicate the deal will “definitely” come up for a vote before the end of the year.