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All Eyes on the U.S.-China Trade Deal as Iran Fears Fade For the week of January 13, 2020

Key Market Data

01/03/2020 01/10/2020 One Week Change YTD One Year
S&P 500 Index 3,234.85 3,265.35 +0.94% +1.13% +28.29%
MSCI EAFE Index 2,042.46 2,040.49 -0.10% +0.20% +18.32%
Barclays Capital U.S. Aggregate Bond Index 2,236.95 2,234.99 -0.09% +0.45% +9.20%
10-year Treasury Note Rate 1.789% 1.821% +3.2 basis points -9.8 basis points -92.2 basis points

Markets brushed aside fears after Iran on Wednesday retaliated for a U.S. air strike that killed its top commander. Oil and gold surged as the news broke, but markets climbed through the week. Strong data out of the non-manufacturing sector, as well as another solid round of employment data helped. As we’ve said before: Behind all the noise there’s a fundamentally strong economy chugging along.

This week, after more than a year of talk, the U.S. and China are expected to put pen to paper and sign a phase-one trade deal Wednesday — it’ll be on to “phase-two” from there. We’ll get an important read on December retail sales — early estimates have been positive. We’ll also dip into the housing market, inflation, and get a sense of how consumers and businesses are feeling about the economy.

WALL STREET WRAP

Dust Settling Between U.S. and Iran? There was a moment of panic in markets Wednesday after Iran launched missile attacks on U.S. air bases in Iraq. Oil prices surged as much as 4 percent and gold jumped 3 percent as jittery investors sought shelter in safe-haven assets. But it was seemingly over before it started. We quickly learned that no U.S. personnel were injured in the attack, and President Donald Trump called for new sanctions and downplayed the impact of the airstrike (Iranian officials even said the strikes weren’t intended to kill). As it stands, neither side seems interested in further escalations that could lead to all-out war in the region. Oil fell steeply as the dust appeared to settle by week’s end.

Still, the situation in the Middle East remains dynamic and unpredictable, with Iran’s President Hassan Rouhani warning of a swift response “if the U.S. makes another mistake.” Based on the market’s reaction last week, this is a situation investors are watching closely.

The Non-Manufacturing Streak Continues: Economic activity in the robust, non-manufacturing sector grew in December for the 119th consecutive month, according to the December ISM Non-Manufacturing Index. The index hit 55, which was 1.1 points higher than in November (any reading above 50 indicates growth) and better than expected. Eleven industries in the index reported expansion, lifted by optimism following a partial trade deal between the U.S. and China. Survey respondents, however, said labor continues to be a challenge. The services reading far outshined the ISM’s manufacturing index, which hit its lowest level since 2009. With the services sector claiming the dominant share of the U.S. economy, December’s report supports our view for continued economic growth in 2020.

A Decade of Job Growth in the Books: The labor market finished the decade strong, remaining on firm footing moving into the 2020s. The U.S. added a seasonally adjusted 145,000 jobs in December — led by education, health and business services — while unemployment remained at 3.5 percent, a 50-year low. Though December payrolls came in lower than consensus (160,000 jobs), they put a bow on what’s been 10 consecutive years of job growth in the U.S. With unemployment at such low levels, job growth could slow, but remain steady, as there are fewer workers waiting on the sidelines. As we move through 2020, we’ll be keeping close tabs on hourly earnings for signs of wage growth, which could lead to inflation and help the Federal Reserve reach its 2 percent inflation benchmark.

A Crunch-Wrapped Inflationary Anecdote: With unemployment at a 50-year low, competition for workers in the United States is growing fierce and that’s pushing companies to sweeten the deal for workers. Case in point: Taco Bell on Thursday announced plans to pay some managers $100,000 a year as part of a test at select company-owned locations. Salaries for general managers currently fall between $50,000 to $80,000, but Taco Bell wants to see if a salary boost will attract and retain talent to boost restaurant performance. It’s one anecdote, but it should come as good news to the Federal Reserve, which is intensely focused on nudging inflation higher to avoid a low-interest rate, low-growth, low-inflation quagmire that could tie its hands in a slowdown.

THE WEEK AHEAD

U.S. and China Reach the Finish Line of the Beginning: After a year of escalating rhetoric on trade and tariffs, investors should breathe a sigh of relief this week as the U.S. and China are set to sign an actual deal Wednesday. The signing was announced weeks ago, but no one knows what’s in the document. Markets will likely respond to any surprises once the full details emerge Wednesday.

So far, 2020 is proving to be a stark contrast to 2019’s trade gloom, but we’re not exactly out of the woods yet. As soon as this deal is signed, both sides will likely start negotiating the phase-two deal.

Prices and Perspectives: This week we’ll get another gauge of inflation in the U.S. economy, which has remained muted for quite some time. We’ll also dig into a flurry of data from consumer sentiment, small business confidence to some broad takes on the economy from the Federal Reserve.

How’d Santa do in December? The all-important December retail sales figures are set to be released on Thursday. While early reads show sales hitting records (especially online), it doesn’t mean good fortunes were shared equally. Sales should be robust but expect the line between retail winners and losers to be more clearly defined in the weeks ahead. Companies adapting to evolving consumer preferences could be poised to impress, while stagnating retailers will likely see their market share shrink even as the overall pie grew larger in 2019.

Building a Sturdy Foundation in Housing? According to the ISM’s non-manufacturing index, survey respondents said demand for housing continued to outstrip supply in December. That sort of dynamic bodes well for home builders and the housing market in general. This week, we’ll get an expanded set of data to see if the trends captured in ISM interviews carry over into deeper surveys of the sector.

Commentary is written to give you an overview of recent market and economic conditions, but it is only our opinion at a point in time and shouldn’t be used as a source to make investment decisions or to try to predict future market performance. To learn more, click here.