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Last December Was The Worst For Markets Since The Great Depression. Traders Hope This Year Is Kinder

One thing's for sure...

Assuming market participants can forget about the Sword of Damocles hanging over their heads (i.e., the looming December 15 deadline for the Trump administration to delay or call off the next scheduled tariff escalation), the data will be in focus during the first week of December.

Those expecting a continuation of the pro-cyclical rotation generally believe the coordinated global easing push from central banks will start to manifest itself (with a lag) in, for example, better PMI data.

On Saturday, China’s official manufacturing PMI rebounded into expansion territory for the first time since April. Similarly, Germany’s factory slump has shown signs of abating and the Markit PMI for the US recently hit a seven-month high, setting the stage for what optimists hope will be a rebound in ISM after three consecutive months spent mired in contraction.

Note that the bounce in China’s NBS gauge helps close the gap with the Caixin print (see the disparity between the yellow and bright-red lines in the chart), but other recent data points to ongoing weakness in the world’s second-largest economy. Industrial profits plunged the most on record in October, for example.

Markets will likely cheer the upbeat PMIs from China, although November export data from South Korea on Sunday was a disaster and could dampen sentiment a bit.

In the US, ISM manufacturing will be front and center this week. “We expect manufacturing ISM to rebound modestly but remain in contractionary territory, reflecting the resolution of the GM strike and the recent stabilization in global manufacturing”, Barclays said Sunday, in a somewhat muted take.

In a lengthy piece out early last week, Credit Suisse cautioned against over-interpreting sub-50 ISM prints. Although the bank doesn’t expect a robust recovery in industrial production in 2020, they do expect a bounce. “Most manufacturing surveys in major economies have improved in recent months, suggesting that global industrial production is close to a trough”, the bank wrote, adding that “ISM manufacturing new orders increased by almost 2 points in October” although still in contraction territory.

(Credit Suisse)

In addition, traders will get to digest ISM services, factory orders and, of course, November payrolls on Friday. The October jobs report was obviously much better than expected. Revisions pushed up the headlines for September and August, dragging the three-month average to 176k.

Between that and a reasonably solid third quarter GDP report (subsequently revised higher), investors are generally content to assume that the US economy isn’t on the verge of falling off any cliffs, even as business investment remains weak.

November payrolls will test that assumption. As Bloomberg notes, “economists… are expecting the report to show the nation added 188,000 in the month, a reading that would be the highest since August and help vindicate the Fed’s signal that its easing cycle is currently on hold”.  Barclays is looking for 195k on the headline. The bank sees the unemployment rate ticking lower to 3.5%, while average hourly earnings should increase 3.0% YoY.

Although Donald Trump will doubtlessly be pleased if we do, in fact, get another solid jobs report, to the extent that effectively rules out even a dovish message at the December FOMC meeting, the White House may pound the table on the desirability of more rate cuts even as the economy holds up.

Markets will weigh the data against a resurgent greenback, near-record high stocks and Treasury yields which, after surging early in November on trade optimism, have recently fallen back amid ambiguity around the “Phase One” Sino-US deal.

“10y UST yields are only modestly above their start of the month levels, and nearly 20bp below their recent peaks”, Goldman’s rates team observed on Friday. The bank calls a tariff rollback “more likely”, but cautions that “the odds of escalation have increased as well, particularly as preconditions to an agreement have mounted”.

Over the weekend, the Global Times said merely scrapping the planned December escalation will not be sufficient – Beijing wants tariff rollbacks.

“A further extension of trade negotiations beyond the de-facto December 15th deadline is likely to leave yields trading without a clear sense of direction in the near term, though risks are skewed towards higher levels from here”, Goldman went on to say late last week, before suggesting that recent flattening is overdone, and recommending 5s30s steepeners in the US curve.

It’s also worth noting that Trump will likely be distracted and quite possibly irritated. The House Judiciary committee is set to hold its first public impeachment hearing this week, and the president has to decide whether to participate.

One thing’s for sure: Nobody wants a repeat of last December…



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