New Record High On Trade Deal Hopes
If you thought that there probably wasn’t going to be a trade deal by December 15th, you were wrong. A common theme with these trade negotiations is that a couple weeks before deadlines, it looks like there is no shot of a deal being done. Then a couple of days before the deadline something is done.
It seemed like the market was done rallying on President Trump's tweets that negotiations were going well. But there was yet another rally because of a tweet. It worked again because there is hard evidence a deal is very close. President Trump wrote, “Getting VERY close to a BIG DEAL with China. They want it, and so do we!”
It looks like phase 1 of the trade deal will be signed on Friday. The deal includes China buying $50 billion in U.S. agricultural goods next year which is exactly what Trump wanted. America will reduce the tariff rates on Chinese goods by half and cancel the tariffs set to go into effect on Sunday. There is a snapback provision where the tariffs are raised if China doesn’t buy the agricultural goods it promised to purchase.
This deal includes China improving intellectual property protections, opening its financial services market, and preventing the manipulation of its currency. We don’t have the details of the deal though. Phase 2 of the deal will be tougher. It will tackle the forced-technology transfer, subsidies, and the actions of Chinese state-owned firms.
Details On Thursday’s Record Setting Rally & The Impact Of The Trade Deal
The stock market hit another record high as the S&P 500 was up 0.86%. It’s up an amazing 26.4% year to date. I see this rally as potentally a limiting factor for 2020’s action. Everything positive has already been priced in. Personally, I can’t see stocks rallying more than 5%.
Because of this rally, the CNN fear and greed index increased 13 points to 74 which is greed. It has been in greed/extreme greed territory since October. VIX fell 1.05 to 13.94 as it has been in the low teens for much of the fall. Nasdaq was up 0.73% and the Russell 2000 was up 0.79%. A financially heavy small cap index liked the spike in treasury yields and the steepening curve. That index is now at 1,644.81 which means it is only down 5.5% from its record peak on August 31st 2018.
It’s no surprise the real estate and utilities sectors fell sharply because rates rose significantly. Utilities fell 0.49% and real estate fell 1.45%. Best 2 sectors were energy and the financials. Energy liked the trade deal and the financials liked the rise in rates and the steepening of the curve.
KBE bank ETF was up 2.89% which was its best single day move since September. This index is at a 14 month high and is the highest relative to the market since the start of 2019. There were 82 new highs in the S&P 500 and none of them where the 4 FANG names.
Big Selloff In Treasuries
The chart below shows the big spike in the 10 year yield as its near my 2% target. It’s starting to price in an economic acceleration next year again. On Thursday it rose 10 basis points to 1.89%. This chart shows it at its peak Thursday evening.
As of early Friday, it was at 1.91% which is still high. It appears to have hit resistance at its recent high from about a month ago. Eventually, the yield should get above 2%. 2 year yield increased 4 basis points to 1.66%. Which means the curve steepened 6 basis points on Thursday.
That was the 2nd most steepening in one day in the past 6 months. 2 year yield is now at 1.67%. Because of that increase, there is now only a 46.2% chance of a cut in 2020. It’s coming closer to my prediction of zero hikes or cuts next year. It’s also in line with the Fed’s guidance.
Ignore The Spike In Jobless Claims
Bears have been getting steamrolled in the past few days. Fed meeting went fine, there is now a trade deal, and the S&P 500 is at a record high. They are grasping at anything. One thing they are pointing to is the big spike in jobless claims in the week of December 7th.
Claims were up 49,000 to 252,000 which was way above estimates for 213,000. 4 week average spiked from 217,750 to 224,000. Normally, I’d ignore one week’s report if it is out of line. That’s especially the case for this week because of its timing. Claims vary widely right after Black Friday. There could be some seasonal jobs ending.
As you can see from the chart below, the standard deviation of the weekly change in seasonally adjusted jobless claims from 1999 to 2018 is the highest in the week of December 9th. That makes this the least important reading of the year.
This increase was double the standard deviation. But I’m still ignoring it until further notice. Now many expect claims to fall to the low 200,000s in the next few weeks. There’s little reason to worry about the labor market after the fantastic BLS report.
Conclusion
There was a nice rally in stocks which brought the S&P 500 to a record high and a sharp selloff in treasuries. Mostly because phase 1 of the trade deal is basically done. It was done just before the deadline on Sunday. Many already thought the global economy would recover. This slightly amplifies those expectations. I think we will see the biggest impact of the deal on the ISM manufacturing report as sentiment should improve.
If the December survey hasn’t been done yet, the PMI could rise above 50. If it has, then it will rise above 50 in January. Ignore the spike in jobless claims because of its timing. Standard deviation of claims is the highest this week.
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