Markets shrug off trade deal, Brexit, soft sales

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Reports of a trade deal and an election that seems to cement Brexit don’t remove the uncertainties that have worried the Federal Reserve.

Boris Johnson’s big win would suggest his plan for Brexit, with Britain leaving the EU by the end of January, will be implemented, but “the U.K. could now face a hard exit or a no-deal departure from the EU by the end of 2020 if the two sides cannot reach a trade agreement,” said Stifel Chief Economist Lindsey M. Piegza.

Similarly, a phase one trade deal agreement with China, which ends additional tariffs that were to take effect Dec. 15 and contains a promise the Chinese will buy more U.S. agricultural products, offers “the equity markets some temporary momentum, but does little to ensure a longer-term lasting deal which includes addressing structural issues in global trade,” she said. “There is still considerable ground to cover before reaching a lasting, longer-term and meaningful deal between the two largest economies in the world.”

Scott Colbert, executive vice president and chief economist at Commerce Trust Co., said there hasn’t been much reaction in the markets. “There are still more questions than answers.” The biggest issue in the talks is intellectual property rights, which was not part of this deal.

The deal “should spur growth a bit and hold back a little inflation,” partly reversing the effects of the tariffs, he said.

The markets rallied this year despite the trade wars because for the past six months the prospects of a recession have diminished, Colbert said. “The trade talks aren’t as big as people make them.”

With discretionary spending down in November, retail sales fell short of expectations, which portends poorly for holiday sales and GDP forecasts.

Retail sales gained 0.2% in the month, the Commerce Department reported Friday, while sales excluding autos inched up 0.1%. This follows rises of 0.4% in the headline number and 0.3% ex-autos for October.

“Any indication the consumer is waning could have sizably negative consequences for growth at year-end and into next year,” Piegza said. “Of course, as always, one report doesn’t tell the whole story, but an ongoing trend of slower spending could have the Fed rethinking additional stimulus.”

“The [Federal Open Market Committee] may have a more disturbing first half 2020 than they currently believe!” Charles Self, chief investment officer at iSector, tweeted.

The lower-than-expected numbers suggest “a subdued start to the holiday shopping season, softer than expected in light of very favorable consumer fundamentals,” Mickey Levy, Berenberg Capital Markets' chief economist for the U.S. Americas and Asia, and U.S. Economist Roiana Reid, write in a note.

The best indicator of contemporary retail trends, non-store retail sales (includes online) rose 0.8% in November, “but it has lost some momentum recently, with its three-month annualized change dropping to 5.4% from over 20% in the summer,” they said.

The purchasing figures in the personal income and consumption report, due on Dec. 20, “are expected to align more closely to these fundamentals.”

But timing could be one reason for the disappointing numbers. "A later-than-usual Thanksgiving and kickoff to the holiday season is at least partially to blame for the weakness,” said Grant Thornton Chief Economist Diane Swonk in a note. “Cyber Monday actually occurred in December, which means that some of the holiday spending we attribute to the start of the holiday season occurred in early December instead of November.”

Import prices
Import prices grew 0.2% in November following a 0.5% slide in October, the Labor Department said, based on increases in petroleum products costs.

Export prices rose 0.2% after a 0.1% slip in October. Economists expected import prices to gain 0.2% and export prices to rise 0.1%.

Also released Friday, business inventories climbed 0.2% in October, as expected by economists, after a 0.1% dip in September, while sales dipped 0.1% after a 0.4% decline the month before.

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