· Dollar gains on Fed rates view, stocks falter
The dollar gained on Wednesday as improving economic data squashed the likelihood of a Federal Reserve interest rate cut in 2020, while a rally in global equity markets wavered as financials shares slipped.
There are jitters regarding the Phase One U.S.-China trade deal as it has yet to be signed, said Sebastien Galy, senior macro strategist at Nordea Asset Management in Luxembourg.
“We are in a wait-and-see mode, momentum has been strong and should continue into year end,” Galy said.
The U.S. dollar rose on Wednesday alongside Treasury yields, boosted for the second straight day by strong economic data earlier this week.
The dollar index .DXY was 0.18% higher to 97.400, with the 10-year Treasury note yield US10YT=RR up 3.3 basis points at 1.922%.
Expectations the Federal Reserve will cut the federal funds rate from the current 150-175 basis point level are 2.2% for the central bank’s January meeting, 4.3% for March and 11% for April, according to CME Group’s FedWatch tool. The same tool shows a 52.9% chance that rates will remain at current levels through December 2020.
The dollar rose 0.3% against the euro EUR= to $1.112. The single currency has struggled to stay above its 200-day moving average of $1.115. The dollar was 0.34% higher against the pound GBP= at $1.308, which has lost all its election gains on fears Britain could leave the European Union without a trade deal.
· The yield curve, which flashed the biggest recession signal in more than 10 years and sent shock waves through the financial markets just a few months ago, is now signaling things are just fine. In fact, it’s saying things are more than just fine, it’s pointing to a faster economy ahead.
The spread between the 2-year Treasury yield and that of the 10-year note climbed to 28.7 basis points on Wednesday, its highest level since November 2018. This move is called a steepening by financial pros and a reversal from the inversion (short-term rates rising above long-term yields) that triggered fears.
“The Fed is on hold, the economy is doing well, and trade tensions aren’t increasing. In such a world, a steeper curve follows intuitively,” Ian Lyngen, BMO’s head of U.S. rates, said in a note Wednesday.
The chance of recession in the next year fell to the lowest level since June, according to respondents to the December CNBC Fed Survey. GDP is forecast to remain at 2% over the next two years, the survey, which polled43 fund managers, strategists and economists, showed.
· Uncertainty remains on Wall Street about China-US phase one agreement: ‘More trade truce than deal’
The “phase one” trade deal between the U.S. and China, supposedly a game changer for the global economy going by the stock market’s rise to a record after the announcement, has left many analysts and investors puzzled about what was specifically agreed to by both sides.
Skepticism is brewing in the markets as much of the details have not been confirmed by both sides. China, in particular, has been reluctant to commit to the amount of agriculture products it’s willing to buy, while big numbers are floating from Washington. Beijing has also been quiet about tariffs on U.S. goods as well as an enforcement mechanism.
“There remains more questions than answers,” Chris Krueger, Washington strategist at Cowen, said in a note. It’s “more trade truce than deal ... It is unclear if any China tariffs on U.S. goods have been reduced ... Vague promises on IP protections.”
Chinese officials were light on the deal content when unveiling the text of the agreement. In a news conference Friday, they said Beijing will increase agricultural purchases “significantly” without specifying by how much. Meanwhile, U.S. Trade Representative Robert Lighthizer said China pledged to buy a total of $40 billion in farm goods over a two-year period. President Donald Trump touted “massive” buying – $50 billion — from China will start “pretty soon.”
“US agriculture is a key signpost to monitor as the Phase 1 deal appears to be ‘ag centric’ and may moderately boost US crop prices and volatility, ” Cesar Rojas, global economist at Citi, said in a note. “However, uncertainty persists about the actual volumes of Chinese soybean, grain and pork purchases, with details on firm commitments lacking and likely to be worked out and also ‘phased in’ over a few years.”
- Next Step
The two sides are in the process of simply translating the text of the deal, Lighthizer maintains, adding they are aiming to sign the accord in early January. Chinese officials said the final step is to complete the legal and translation work before signing.
Trump also said the U.S. would begin negotiations on the next phase of the trade deal “immediately,” rather than waiting until after the 2020 election. China has not commented on the status of a phase two agreement.
· U.S. economy on good path with rates on hold, Fed policymakers say
The U.S. economy is in good shape after three interest-rate cuts this year, two U.S. central bankers said on Wednesday, underscoring the consensus at the Federal Reserve for keeping borrowing costs where they are for the time being.
- “I think the economy is doing remarkably well,” Chicago Federal Reserve Bank President Charles Evans told the Economic Club of Indiana. And though he is “personally worried” that inflation continues to run below the Fed’s 2% target, he now sees enough accommodation in place to boost it to 2.2% by 2022.
- New York Fed President John Williams on Wednesday also expressed an optimistic outlook for 2020.
“I feel very good about how the economy’s been this year, how it’s progressed and feel very good about how it’s going to look next year,” Williams said in an interview with CNBC.
· House votes on whether to impeach President Donald Trump
A bitterly divided U.S. House of Representatives neared a historic vote to impeach Donald Trump on Wednesday after a day-long debate in which Democrats called the president a threat to democracy and Republicans called the proceedings a partisan coup.
Trump would become the third U.S. president to be impeached. That would set the stage for a trial in the Republican-led Senate next month, with House members acting as prosecutors and senators as jurors. A conviction would result in his removal from office, but the Senate’s top Republican has said there is “no chance” of that happening.
On a day when the U.S. House of Representatives debated whether President Donald Trump should be removed from office, members of his administration fanned out across the country to make the case that the president is steadily getting the job done.
Attorney General William Barr also was in Michigan, announcing a crackdown on violent crime.
Secretary of Health and Human Services Alex Azar proposed a plan to allow states to import cheaper prescription drugs from Canada in an effort to lower drug costs - a top concern for many voters.
· House majority votes to impeach President Donald Trump
A majority of the House of Representatives on Wednesday voted to impeach President Donald Trump for high crimes and misdemeanors. The vote marked only the third time in American history that the full chamber has approved articles of impeachment against a president.
The largely party-line vote represented the culmination of a sprawling three-month investigation that was conducted by multiple committees in the Democratic-controlled House, and which was opposed at every turn by the White House and congressional Republicans.
· BOJ to keep policy steady on easing trade tensions, may warn of soft output
The Bank of Japan is expected to keep monetary settings steady on Thursday and maintain its upbeat view on the economy, suggesting policymakers are in no hurry to boost stimulus even as global risks threaten to scupper a fragile recovery.
But the central bank may offer a gloomier view on factory output than at its previous rate review in October, nodding to the widening fallout from soft world demand and the U.S.-China trade war.
· Oil prices steadied on Wednesday after U.S. government data showed a decline in crude inventories and on expectations for an uptick in demand next year on the back of progress in resolving the U.S.-China trade fight.
Brent futures LCOc1 gained 7 cents to settle at $66.17 a barrel while U.S. West Texas Intermediate (WTI) CLc1 ended the session down 1 cent at $60.93 a barrel per barrel.
U.S. crude fell by 1.1 million barrels in the week to Dec. 13 to 446.8 million barrels, compared with analysts’ expectations in a Reuters poll for a 1.3 million-barrel drop, the Energy Information Administration said.
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