What is the set-up going into the next decade? That all depends on how trade flows balance out with emerging economies like India and China. These two countries have massive consumer bases and getting our trade policies right may preserve our manufacturing base, protect intellectual property and re-balance wages across the globe. Remember, the guidelines of international trade are not set in stone and the newer players tend to make up their own rules. As China and India mature and agree to more concrete terms, there could be nice set-up for international business in the coming decade for the United States.
What is the set-up going into next year? For most of the past two years we have seen the market demonstrate a very choppy pattern that many feared indicated the end was nigh. The Fed thought this was also the end to their quantitative easing program but even that only had a hiatus of only 12 months. The Fed needs a buffer like GDP running solidly above 3% for many quarters before they can reverse course so don’t expect any changes soon. In the meantime, the excess liquidity should continue to find its way back into the stock market as there is little alternative when yields are this low.
What is the set-up going into next week? In the chart, the S&P 500 is trying to break-out from this sideways price action that began after the top in January 2018. However, there are two trend lines that the market is trying to push through meaning there should be more choppy price action into next week (see below). The Fed meets again on Wednesday so an accommodative tone could could keep a bid to the stock market well into 2020.
Chart of the Week!
Rachel Soloveichik, a research economist with the Bureau of Economic Analysis, has estimated that in 2017, illegal activities would have added more than 1% to GDP – a larger portion of U.S. GDP than agriculture, forestry, fishing and hunting.
Economic & Central Banking Snippets
- Prime Minister Shinzo Abe’s cabinet approved a $120 billion stimulus program, Japan’s largest in more than three years, citing the same global economic risks that have led central banks in the U.S. and Europe to cut interest rates. Mr. Abe’s plan is also aimed at healing a self-inflicted wound on the Japanese economy: the October increase in the national sales tax to 10% from 8%. Retail sales fell 7.1% in October and car sales were particularly hard-hit, suggesting the tax may have led consumers to refrain from big-ticket purchases. (WSJ)
- China’s manufacturing sector expanded at its fastest pace in three years in November, according to a private survey, bucking the impact of the US-China trade war and declining business confidence. “If trade negotiations between China and the US can progress in the next phase and business confidence can be repaired effectively, manufacturing production and investment is likely to see a solid improvement,” according to Zhengsheng Zhong, director of macroeconomic analysis at CEBM Grouphe. (FT)
- The US economy added 266,000 jobs in November, beating analyst estimates by a wide margin and showing the continued strength of the US labor market. The unemployment rate dropped back to a historic low of 3.55, according to data released by the US Department of Labor. Analysts had estimated that the US economy would create 180,000 jobs in November. Most of November’s jobs gains came in education and health care as well as leisure and hospitality.
- German Industrial output dropped 5.3% in October from the same month in 2018, according to the Federal Statistics Office. The figures suggest that the German industrial slowdown is likely to weigh on overall eurozone growth in the fourth quarter. Combined with data published this week showing industrial orders fell sharply in October, and with most manufacturers expecting a further shrinkage in November, the figures suggest that the two-year downturn in German manufacturing is nowhere near close to ending.
- There are now more reasons to make furniture in the U.S. than at any point since the financial crisis. Crate & Barrel and Williams-Sonoma are expanding manufacturing in the U.S., and the factories of longtime furniture makers are humming. Consumers demand their choice of fabrics and features but don’t have the patience to wait two months for an item to arrive from Asia. At the same time, tariffs are stepping up pressure on American manufacturers to move production home. (WSJ)
- Four UPS workers have been arrested as part of a long-running investigation into how criminal organizations use the shipping giant to move narcotics into the U.S. (WSJ)
- An 1,800-mile pipeline is set to begin delivering Russian natural gas to China. The $55 billion channel is a feat of energy infrastructure—and political engineering. Russia’s most significant energy project since the collapse of the Soviet Union. (WSJ)
- Online sales rose more than 19.6% to $7.4B on Black Friday, marking the day’s largest revenue grab ever, according to Adobe Analytics, which tracks transactions at 80 of the top 100 U.S. retailers. For Thanksgiving, it estimated web sales grew 14.5% to $4.2B, while Small Business Saturday and Super Sunday sales are projected to surpass $7.6B. (Seeking Alpha)
- Aramco valued at $1.7 trillion in world’s biggest IPO. Saudi Aramco priced its initial public offering at the high end of the targeted range to give the oil giant a total value of $1.7 trillion. While it ranks as the world’s biggest-ever IPO, the share sale falls well short of the initial $2 trillion valuation targeted by Saudi Crown Prince Mohammed bin Salman. (WSJ)
That is all for now and thank you for being a subscriber!
Paul J. McCarthy, III
President – Kisco Capital