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MCF Weekly Capital Market Review - October 14th, 2019

Trump teased the public over the weekend on the US-China trade deal, saying “Good things are happening” and that the deal is the greatest and biggest for US farmers. More details were released Sunday with Trump introducing phases for the trade deal. Phase One involves China immediately purchasing “very large quantities” of US agricultural product. The reported range is $40-$50 billion, which would about double the 2017 level of US agricultural exports to China.[1] In return, the US will keep tariff rates at 25% (rather than raising to 30% as scheduled for October 15) on $250 billon of Chinese goods.[2] There are no details of Phase Two or its contents, much less the number of phases and respective timelines. If Phase One turns out to be true, even partially, it would be a positive episode in the long and continuing saga of the US-China trade war.

Brexit will likely be back in the news by the end of week as Prime Minister Boris Johnson has until October 19th to deliver a Brexit deal approved by Parliament. If not, he would be legally required to request an extension from the EU.[3] Losing three Brexit deal votes and extending the deadline twice effectively ended the PM tenure of Johnson’s predecessor Theresa May, who was forced out by the Tory party as a result. Johnson ran a hardline campaign for PM promising to deliver Brexit by October 31 and wishes to avoid a similar fate as May. There is little talk surrounding the details of a deal, so businesses and investors are still left guessing. Odds place a 28% chance of Brexit being cancelled altogether.[4]

Powell announced that the Fed will soon expand its balance sheet.[5] In reality, the balance sheet reached an inflection point at the end of August and has expanded since the beginning of September.[6] Monetary expansion is the Fed’s plan going forward, but Powell admonished that policy is not preset. The Fed will continue to be data dependent and will likely change depending on an array of financial and economic factors. Given softer inflation data and weakening economic outlook, especially globally, a lot of positive news would be required to reverse course.

CPI was softer than expected with a year-over-year reading of 1.7%; producer prices were even softer at 1.4%. Weakness in labor markets is starting to show with the JOLTS job openings and new hires both falling more than expected. Economic indicators were not all negative as consumer sentiment enjoyed a nice bounce since last month.

This week’s releases will include retail sales, the Beige book, and several Fed member speeches.


[6] https://fred.stlouisfed.org/series/WALCL


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