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The U.S. Week Ahead (Dec 16-20): Uncertainties Give Way Ahead of the Holidays

By:

Senior Market Analyst at Interactive Brokers

While a handful of lingering event risks have subsided somewhat this past week, market participants are generally gearing up for another heavy calendar of activity ahead of the holidays.

Uncertainties over the departure of the UK from the European Union, or Brexit, as well as U.S.-China trade relations each have eased back a bit, with the general election victory of Boris Johnson and his party, as well as U.S. President Donald Trump’s s sign-off of a so-called ‘phase one’ agreement.

Analysts at Janney Montgomery noted that although the UK election provided the global financial markets with clarity about Brexit, “particularly after the solid win by the conservative party,” many investors are now considering what that exit will mean for the UK, “including more expensive goods and possible economic pressures.”

Meanwhile, risk appetite continued to surge early Friday, amid the steps taken to avert the U.S.’s scheduled December 15 tariffs on imported Chinese goods, as prices of U.S. Treasuries fell across most of the yield curve.

Janney Montgomery added that President Trump’s sign-off on ‘phase one’ of trade negotiations “overshadowed negative comments later expressed by China’s foreign minister about political stances the U.S. has taken.” However, the combined actions show that this US-China trade situation has “many layers that can stir up volatility in risk assets.”

By Friday’s trading session, the yield on the 10-year U.S. Treasury note was bid at around 1.82% after ending Thursday at 1.90%–a jump of 43 basis points from its most recent trough of 1.47% set at the start of September.

Meanwhile, the economic calendar in the week ahead is chalk full of salient data, including IHS Markit’s flash reading of its Manufacturing and Services Purchasing Managers’ Indexes (PMIs), existing home sales, as well as a final reading of gross domestic product (GDP) growth for the third quarter of 2019, personal income and spending for November and the latest measure of the Personal Consumption Expenditure (PCE) Price Index.

Market participants will most likely be keeping a close eye on the incoming data for any signs that may spur a shift in the Federal Open Market Committee’s (FOMC) stance on monetary policy, after keeping the federal funds rate at its target range of 1.5%-1.75% at its latest meeting in December.

The FOMC largely attributed its decision to a “strong” labor market, economic activity that has been rising at a “moderate rate,” along with a “strong pace” of household spending. However, the Fed pointed out that business fixed investment and exports remain “weak.”

Manufacturing & Services

The week gets underway Monday with an update on the manufacturing and services scenes, with IHS Markit’s PMI flash readings for December.

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The fresh flash figures fall against a backdrop of improving manufacturing and services conditions, with numbers in November indicating increased demand across the U.S. private sector.

IHS Markit economist Siân Jones noted that manufacturers had especially provided signs of a further recovery from the summer’s lull.

Jones continued that although “expansions have not yet reached rates seen at the end of 2018, firms are reporting clients are less hesitant to place orders.”

In the meantime, the downbeat sentiment among businesses for 2020 expressed in November could well reverse, given the recent simmering of U.S.-China trade talks and Brexit uncertainties.

Stocks & Exchange-Traded Funds (ETFs)

Against this backdrop, stocks have generally soared, with the S&P 500 having reached new heights in 2019, while many in the market foresee the climb to continue into the new year – albeit amid a heavy dose of election anxieties.

Year-to-date in 2019, the S&P 500 has gained more than 26.3%, the SPDR S&P Retail ETF (NYSEARCA: XRT) and the Amplify Online Retail ETF (NASDAQ: IBUY) are up around 12.4% and 25.0%, respectively, while the Industrial Select Sector SPDR Fund (NYSEARCA: XLI) has earned over 29%.

The gap in gains between the IBUY and XRT ETFs is likely due to increased on-line shopping.

According to Adobe Analytics, on-line holiday spending in 2019 is set to grow more than 14% year-on-year, surpassing US$140bn.

IBUY includes among its top holdings exercise equipment company Peleton (NASDAQ: PTON), streaming media giant Netflix (NASDAQ: NFLX) and fintech icon Paypal (NASDAQ: PYPL), while XRT holds firms such as Game Stop (NYSE: GME), Tiffany & Co (NYSE: TIF) and Best Buy (NYSE: BBY).

XLI’s top holdings include Boeing Company (NYSE: BA), Honeywell International (NYSE: HON) and Union Pacific Corp (NYSE: UNP).

GDP & PCE

With GDP and PCE data capping the week, IHS Markit economist Siân Jones highlighted that recent GDP releases have showed that domestic expenditure has helped drive solid economic growth during the third quarter of 2019.

However, core inflationary pressures (excluding food and energy) are expected to remain below the target rate of 2%, “suggesting there will be no change in sentiment from policy makers surrounding any upside risks from inflation.”

Market participants may receive more clues about the path of monetary policy, as several Federal Reserve chiefs are due to give speeches in the week ahead, including Dallas Fed president Robert Kaplan, Boston Fed president Eric Rosengren and Chicago Fed chief Charles Evans.

On the Economic Calendar:

Monday, December 16

  • New York Empire State Manufacturing (Dec)
  • IHS Markit (Flash) Manufacturing PMI (Dec)
  • IHS Markit (Flash) Services PMI (Dec)
  • National Association of Home Builders (NAHB) Housing Market Index (Dec)

Tuesday, December 17

  • Housing Starts (Nov)
  • Industrial Production (Nov)
  • JOLTs
  • American Petroleum Institute (API) Crude Oil Stocks

Wednesday, December 18

  • U.S. Energy Information Administration (EIA) Crude Oil Stocks

Thursday, December 19

  • Philadelphia Fed Manufacturing Index (Dec)
  • Existing Home Sales (Nov)

Friday, December 20

  • Personal Income & Spending (Nov)
  • GDP – Final (Q3)
  • PCE Price Index (Nov)
  • Michigan Consumer Sentiment – Final (Dec)

In the meantime, select the Event Calendar option in the IBKR Trader Workstation for a full list of U.S. and global corporate events and earnings, dividend schedules, economic data, IPOs and more.

Disclosure: Interactive Brokers

The analysis in this material is provided for information only and is not and should not be construed as an offer to sell or the solicitation of an offer to buy any security. To the extent that this material discusses general market activity, industry or sector trends or other broad-based economic or political conditions, it should not be construed as research or investment advice. To the extent that it includes references to specific securities, commodities, currencies, or other instruments, those references do not constitute a recommendation by IBKR to buy, sell or hold such investments. This material does not and is not intended to take into account the particular financial conditions, investment objectives or requirements of individual customers. Before acting on this material, you should consider whether it is suitable for your particular circumstances and, as necessary, seek professional advice.

Disclosure: Author Security Holding: No Positions

The author does not hold any positions in the financial instruments referenced in the materials provided.

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