How progress on trade may keep Fed rate cuts on hold

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The reported plan to phase out trade tariffs between the U.S. and China may keep the Federal Reserve on the sidelines.

“Financial markets remain determined to climb higher as global equities were boosted after China’s Commerce Ministry spokesman Gao Feng noted that both sides had agreed to simultaneously cancel some existing tariffs on one another’s goods,” Edward Moya, senior market analyst, New York at OANDA. “Optimism is sky high for this phase-one trade deal, as the yuan is back below the seven level and as U.S. stocks that are impacted by Chinese trade are back near the highs that we saw back in May.”

Since a first phase of a trade deal has been in the news for a while, markets have fully priced in a deal, despite a lack of details or timing for its signing, Moya said.

“While the recent thaw is a positive,” said Sameer Samana, senior global market strategist for Wells Fargo Investment Institute, “it probably does not change the trajectory of global economic growth, which we expect to continue to slow into 2020.”

With political and economic pressure increasing for both nations to reach an agreement, he said, this is “the bare minimum.”

If this agreement is signed, “It probably negates the need for additional Fed rate cuts in the near-term, which helped boost markets,” Samana said.

However, Marty Mitchell of the Mitchell Market Report said, “concerns about when and where the partial U.S./China trade agreement will be signed took U.S. yields lower (10yr -2.7bps) during Asian hours after yesterday's news that the signing will be delayed into December.”

On Twitter, Grant Thornton Chief Economist Diane Swonk said, “Tariff reductions in the preliminary deal, which has not yet been confirmed by the American side, could amount to a bargaining win for Beijing. China has long said that the United States must roll back levies as a condition of a trade deal...”

Consumers will consume
Separately, consumers said they plan to spend more this holiday season, but expect to get great deals, according to a Conference Board survey released Thursday.

Consumers have been fueling the economy as businesses have held off on spending, awaiting resolution to the uncertainty created by the trade war. The survey showed consumers expect to spend $675 on gifts this holiday season, up from $627 last year.

“This holiday season has all the makings of a good one,” says Lynn Franco, Senior Director of Economic Indicators at The Conference Board. “Consumers are gearing up for the holidays, with signs indicating they will not rein in their spending.”

Initial claims
Initial jobless claims fell 8,000 to 211,000 in the week ended Nov. 2, the Labor Department said. Continued claims dipped to 1.689 million in the week ended Oct. 26 from 1.692 million a week earlier.

Economists polled by IFR markets expected 215,000 initial claims.

Housing
Housing affordability was at its highest level in three years, with 63.6% of homes sold from July to September priced in a range affordable to families earning the median U.S. income of $75,500, the National Association of Home Builders (NAHB)/Wells Fargo Housing Opportunity Index indicated.

"With mortgage rates at historic lows, consumers are experiencing greater buying power and increased affordability," according to NAHB Chairman Greg Ugalde.

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