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A Key Trade Deadline Approaches as Jobs Data Shines For the week of December 9, 2019

Key Market Data

11/29/2019 12/06/2019 One Week Change YTD One Year
S&P 500 Index 3,140.98 3,145.91 +0.16% +27.90% +19.07%
MSCI EAFE Index 1,974.47 1,981.63 +0.36% +19.33% +16.86%
Barclays Capital U.S. Aggregate Bond Index 2,226.55 2,221.67 -0.22% +8.55% +9.82%
10-year Treasury Note Rate 1.777% 1.838% +6.1 basis points -84.7 basis points -105.8 basis points

Investors partied like it was 1969 last week and pushed stocks higher after a glowing jobs report showed unemployment dipped to 3.5 percent, a 50-year low. It was a stellar report all around, and there were a few data points beyond the headline figures that we viewed as particularly encouraging. The strong employment data helped investors overlook a shakier start to the week as a new front in the trade war opened on the same day investors digested so-so manufacturing data.

This week, voters in the United Kingdom will head to the polls for a key election, and the results could provide the final word on Brexit … maybe. Also, a major focus this week will be whether China and the U.S. strike a deal to avoid a Dec. 15 deadline to increase tariffs again. In addition, we’ll be keeping an eye on new data from retailers and small businesses, along with the latest gauge of inflation.

WEEK IN REVIEW

A sparkling jobs report: Let’s dig a little deeper into last week’s employment numbers. The U.S. economy added 266,000 jobs in November, smashing expectations of roughly 186,000 (jobless claims also fell month over month). Hiring was particularly robust in health care, restaurants and transportation, while manufacturing employment also rose (November’s figures were boosted by 41,000 striking auto workers returning to the job).

As noted in our prior market wrap, one thing we were looking for was any evidence of broad-based wage growth, and it showed up in this report. Nonsupervisory wages, or employees who aren’t in higher-level management, rose 3.7 percent compared to last year and 0.2 percent month over month. At the same time, inflation remains low, rising just 1.3 percent year over year. Essentially, that means workers at all levels in the U.S. are experiencing real wage growth, and that should continue to support spending and bolster household budgets moving into next year. For example, year-over-year wage growth in October outpaced mortgage rates in the same month for the first time since 1972.

The data also gives the Federal Reserve more reason to remain on the sidelines as the economy continues chugging along. The Fed will meet this week, and it is widely expected that it will keep rates unchanged. Still, investors will be paying attention to Chairman Jerome Powell’s comments about the economy.

Mixed week for manufacturers: It was another mixed bag for manufacturers last week. President Donald Trump started the week with a surprise announcement on Twitter that he would restore tariffs on all steel and aluminum from Argentina and Brazil. At roughly 19 percent of all steel imports to the U.S. in 2019, Brazil represents the largest source of foreign steel (a year-over-year increase of 48 percent). Stocks went red Monday in response to open the week.

Stocks declined further after the Institute for Supply Management’s manufacturing index fell to 48.1 in November from 48.3 in October. It’s now the fourth consecutive sub-50 reading (below 50 indicates contraction) as manufacturers continue to navigate the fog of tariffs and trade disputes.

However, a different measure of manufacturing activity, the Markit manufacturing PMI, rose to a seven-month high, with a reading of 52.6 in November. New orders rose at their fastest clip since January, although the survey noted expectations about the future remain subdued, driven by tariffs and fears that buying will slow during the upcoming election year. The contrasting reports could be a sign that, although weakened, manufacturers are showing signs of stabilization.

Differing stories abroad: On the other side of the ocean, China’s manufacturing sector expanded at its fastest pace in three years in November. The unofficial Caixin-Markit purchasing manager’s index reached 51.8 in November, a small bump from 51.7 in October. China’s official manufacturing PMI, which typically trails the Caixin, also showed the manufacturing sector returning to growth, up to 50.2 in November from 49.3 a month prior. Still, like their peers in the U.S., the trade dispute is having the same dampening effect on business confidence. In Germany, manufacturing orders continued to slide, dropping 5.3 percent year over year — the deepest contraction since 2019.

THE WEEK AHEAD

Tariff deadline looms: This week will deal us a bit of a wild card: Currently, the U.S. is set to slap new tariffs on $156 billion worth of Chinese goods on Dec. 15. A key focus this week will be on whether the two sides strike a preliminary deal or push the deadline out further. While most strategists expect the deadline will be delayed, President Trump has proven to be predictably unpredictable. Markets will likely be sensitive to any good or bad news on this key trade plotline this week.

Election time in the UK ... again: On Thursday, voters will go to the polls for a big election in the United Kingdom. It’s the third general election in the country since 2015 (they typically occur every five years), and Brexit is once again the big issue to sort out. Prime Minister Boris Johnson’s Conservative Party has promised to “get Brexit done” in January 2020, hoping to channel frustrations of people who voted to leave back in 2016. Jeremy Corbyn and the Labour Party are promising a wave of progressive reforms, along with a promise to put Brexit to a second referendum. Markets may move later this week as investors digest the results.

Small business and retailers report: A big week for retailers large and small is now behind us, but how were they fairing into these crucial shopping days? We’ll find out this week as we get new data from the NFIB small business index and retail sales numbers.

Where’s inflation headed? As we stated above, inflation has remained low and wage growth has outpaced rising prices. That’s boded well for consumers and their household balance sheets. We’ll see if the economy has continued to grow with a backdrop of moderate inflation. If growth and inflation continue to hang in this “Goldilocks zone,” Fed Chairman Jerome Powell won’t have much work to do in the coming months.